Nova workboard

a blog from young economists at Nova SBE

Do the poor have enough money to buy things for cheap?

It’s expensive to be poor.

This observation may seem to have come out of the blue – nevertheless, it is not unusual for the poorest among us to end up paying a higher price per unit of consumption. Poor people tend to pay more to buy and borrow. This price differential goes by the name of poverty penalty.

In developing countries, poverty penalties mainly arise due to institutional obstacles and physical barriers, preventing the poor from gaining access to the same markets as those who do not live in a situation of poverty. These types of obstacles are sparse in developed countries: even still, citizens in these countries also suffer from poverty penalties, except that they come into fruition through different mechanisms – market ones.

When market mechanisms are left to work for themselves, their standard functioning tends to punish the poor. According to Dalsace et al., unfavourable cost and price structures, among others, can lead to a price-wise discrimination of the poor. If a cost structure is ill-fitting to small-quantity purchases – because, for some companies, the unitary cost of production of certain goods will be higher when the quantity produced is smaller – it can be harmful for the budget of the poor. This happens because households generally use savings strategies which imply greater short-term expenditures in exchange for longer-term savings. A good example of this type of savings behaviour is buying in bulk, or accelerating acquisitions so as to enjoy temporary discounts. Even though the poor have greater incentives to take advantage of these discounts than the rich, they have less possibilities to do so, as they commonly have smaller liquidity (or only have it closer to their payday). Orhun and Palazzolo studied this by analysing data on toilet paper purchases: it is typical for a poor household to not be able to purchase a 30-unit pack for €24, and instead end up buying a 4-unit pack for €5. On top of paying a higher unitary price, by getting the smaller package the poor are less likely to be able to build a sufficient inventory. Thus, they most likely won’t have the means to wait until the next discount comes around, and whenever they run out of the good (especially when we are talking about essential goods) they will have to go to the store and get it, at whatever price it costs in that moment. Poorer households’ relative inability to purchase in bulk and on sale will have a compounding effect, aggravating the poverty penalty: not being able to take advantage of buying in bulk will hinder their ability to enjoy temporary discounts, and vice-versa. Orhun and Palazzolo found that the financial losses low income households incur due to underutilisation of these strategies can be half as large as the savings they accumulate by purchasing cheaper brands. Lower-income households ended up paying 5,5% more per roll of toilet paper than they would if they were able to buy more in the likes of high-income households. On top of this, poorer households are less likely to own a car, and hence may not be able to easily access cheaper supermarkets. If their food choices are also limited due to transportation constraints, poor households may have to incur in greater food spending, buying their necessities at a more expensive, but more easily accessible corner store or supermarket.

In regards to changes in the price level, the poor also take a greater toll. The prices of items which make up the greater part of their budgets (like food or rent) have had a faster rise than those of other types of goods. Even though decreasing oil and energy prices apply contrary pressure to this tendency, usually the poor own fewer cars, and hence will benefit less from reduced oil prices.

With lower and more irregular incomes, the poor may have frequently unpaid bills and a negative balance on their bank account (if they can afford to have one) – hence, they are considered less creditworthy. All of this increases poor people’s impotence in the face of the market – when they have limited liquidity, their needs are high and there are few options to choose from, they will see their power severely diminished. Inequality is worse than income figures alone make us believe, as the constraints around poorer households’ spending patterns make them incur in higher costs.

All in all, there are a lot of opportunities to save money – you just need to have enough money to enjoy them.

Madalena Páscoa

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Author: studentnovasbe

Master student in Nova Sbe

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