FEATURE
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PRIME DISCRIMINATION: COULD FAST FOOD CHAINS BE RACIST? By Youssef Oukhallou, Economic Development and Policy Analysis (2019)
D
o the poor pay more? This seemingly simple question has captivated the interest of several economists during the last decades. It all started with David Caplovitz’s seminal study where he uncovered how low-income families in New York paid higher prices than the rich for both food and consumer durables. This first research came as a reaction to the 1960s riots, and corroborated the commercial discrimination practices that were denounced by the residents of poor and African American neighbourhoods during said riots. Throughout their studies, American sociologists such as Caplovitz described this situation as “unfair” and those practices as “unethical and illegal” (Caplovitz, 1963). This topic sparked attention again after the 1990s race riots. This time, the focus turned to racial discrimination. In 1995, Economists and law experts Ian Ayres and Peter Siegelman investigated race-based price discrimination in the cars market in the US, and found that African American buyers were charged for identical cars largely higher prices than white buyers. Economist Kathryn Graddy examined this same question in the fast-food sector and then investigated, alongside Diana Robertson, whether the price discrimination is linked to store franchising (Graddy & Robertson, 1999).
Economists Ian Ayres and Peter Siegelman had found that African American buyers were charged largely higher prices in the US cars market They found that price discrimination is not intentional. Some authors, especially in the marketing field, even argue that in some situation, price discrimination could lead to relatively efficient prices. This argument holds particularly when the price discrimination is based on each costumer’s valuation of a certain good (Geng et al, 2005, and Armstrong, 2006). This article replicates the methodology established by Graddy with the aim to explore the existence of fast-food price discrimination in the US based on racial and socioeconomic characteristics. The emphasis is put on the influence of race
and income level on the prices of a meal in four American restaurants in different areas. The model fits in an imperfectly competitive framework, where marginal cost is not the only variable explaining the pricing policy. Thus, following the seminal theoretical framework in this field (Bresnahan, 1989, and Porter, 1983), combined with the hypothesis of constant elasticity of demand, the supply relations equation could be expressed as follows: Log P= logMCi – log [1+(1/ε.θi )]
(1)
Where P is the market price, ε is the price elasticity of demand, MCi is the marginal cost of each firm and θi is an index of the extent to which stores’ conduct is close to perfect or imperfect competition. This equation can also be augmented by encompassing an explicit discrimination coefficient (1– d). It then becomes: Log P = log MCi – log (1– d) – log [1+(1/ε.θi )]
(2)
For this particular case study, the intuition behind the Becker discrimination coefficient would be that if a fast-food chain has a taste of discrimination against African-American buyers, said chain would be willing to accept a smaller price p(1 – d) rather than p in areas with a lower proportion of the black community (Graddy, 1997, and Becker, 1971). Based on the abovementioned elements and with the purpose of analysing whether fast-food prices change based on the ethnic and socioeconomic characteristics of an area, the following equation is estimated: Log Piz = α + β.Rz + γ. COMPiz + ω. MCiz + εiz
(3)
The ethnicity and income vector Rz includes, for each area z, the proportion of the black community, the median income and the proportion of the population below the poverty threshold. COMPiz is a vector that encompasses variables that represent whether a store is company-owned or franchised, the proportion of the population without a car, and the store concentration in each area.
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