Firm Heterogeneity in Consumption Baskets: Evidence from Home and Store Scanner DataDmitri Koustas provided outstanding research assistance

A growing literature has emphasized the role of Melitz-type firm heterogeneity within sectors in accounting for nominal earnings inequality. This paper instead explores the implications of firm heterogeneity for household price indices across the income distribution. Using detailed matched US home and store scanner microdata that allow us to trace the firm size distribution into the consumption baskets of individual households, we present evidence that richer US households source their consumption from on average significantly larger producers of brands within disaggregated product groups compared to poorer US households. We use the microdata to explore alternative explanations, write down a quantitative framework that rationalizes the observed moments, and estimate its parameters to quantify the underlying channels and explore general equilibrium counterfactuals. Our central findings are 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. We find that these price index effects significantly amplify observed nominal income inequalities in both the cross-section of households and for changes over time, and that they lead to a significantly more regressive distribution of the gains from international trade.