What is the Price of Tea in China? Towards the Relative Cost of Living in Chinese and U.S. Cities
We examine the price and variety of products at the barcode level in cities within China and the United States. In both countries, there is a greater variety of products in larger cities. But in China, unlike the United States, the prices of products tend to be lower in larger cities. We attribute the lower prices to a pro-competitive effect, whereby large cities attract more firms which leads to lower markups and prices. Combining the effect of greater variety and lower prices, it follows that the cost of living for grocery-store products in China is lower in larger cities. We further compare the cost-of-living indexes for particular product categories between China and the United States. In product categories with a significant presence of U.S. brands in the Chinese market, the availability of additional Chinese brands leads to greater variety than in the United States, and therefore lower Chinese price indexes for that reason. In product categories with much less presence of U.S. brands in the Chinese market, however, the observed prices differences between the countries (usually lower prices in China) are partially or fully offset by the variety differences (less variety in China), so that the cost of living in China is not as low as the price differences suggest, especially in smaller cities.
We thank John Romalis and participants at an NBER conference for their helpful comments and Qi Liu for research assistance. Financial support from the National Science Foundation and the China Scholarship Council is gratefully acknowledged, as are the elasticities of substitution provided by Hottman, Redding, and Weinstein (2016). Calculations are based on data from the Nielsen Company (China) and from the Nielsen Company (US), LLC and marketing databases provided by the Kilts Center for Marketing Data Center at the University of Chicago Booth School of Business. Information about the U.S. data and access are available at http://research.chicagobooth.edu/nielsen/. © The Nielsen Company. Circulated with permission. Please direct correspondence to: Robert Feenstra, University of California, Davis, email@example.com. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.