Income Distribution, Price Elasticity and the ‘Robinson Effect’

In The Economics of Imperfect Competition, Joan Robinson argued that an increase of the consumers’ incomes should make demand less elastic—which, although reasonable about individual demand as an assumption on preferences, suggests a role for income distribution as far as market demand is concerned. We use Esteban's (International Economic Review, Vol. 27 (1986), No. 2, pp. 439–444) income share elasticity to provide sufficient conditions on income distribution that support the ‘Robinson effect’—i.e. such that a negative (positive) relationship between individual income and price elasticity translates into a negative (positive) relationship between mean income and market demand elasticity. The paper also provides a framework to study the effects of distributive shocks on the price elasticity of market demand.