Firm Heterogeneity in Consumption Baskets : Evidence from Home and Store Scanner Data

A growing literature has documented the role of firm heterogeneity within sectors in accounting for nominal income inequality. This paper explores the implications for household price indices across the income distribution. Using detailed matched US home and store scanner microdata, we present evidence that rich and poor households source their consumption from different parts of the firm size distribution within disaggregated product groups. We use the microdata to examine alternative explanations, propose a tractable quantitative model with two-sided heterogeneity that rationalizes the observed moments, and calibrate it to explore general equilibrium counterfactuals. We find that larger, more productive firms endogenously sort into catering to the taste of wealthier households, and that this gives rise to asymmetric effects on household price indices. These effects matter for real income inequality. We find that they amplify observed changes in nominal inequality over time, lead to a more regressive distribution of the gains from international trade, and give rise to new distributional implications of business regulations