Price Pilgrims

Do immigrants drive up consumer prices? Competitive theory predicts they should, as increased demand induces retailers to ask more for the same items. But a forthcoming study in the Journal of Political Economy finds that a wave of immigrants to Israel had just the opposite effect, driving down prices on everything from fish to furniture.

About 192,000 residents of the former Soviet Union relocated to Israel from October 1989 to December 1990, fleeing a collapsing government and changing the composition of Israeli society. Saul Lach, an economist at the Hebrew University of Jerusalem, studied store-level data on 915 products in 52 Israeli cities over the course of 1990. He found that Israelis in a city with the average proportion of new immigrants enjoyed a 2.6 percent drop in prices.

Lach offers two possible reasons for the price break: higher price elasticity and lower search costs. Immigrants would have lower incomes and lack brand loyalties, making them more sensitive to price. Intense bargain hunting would cost them less, since they were initially unemployed.

Evidence from the early ’90s shows that immigrants did spend more time shopping than native Israelis, not least because there were new to the idea that goods would be priced differently in different stores. They also bought slightly different products than did locals. While the price of alcohol overall fell only slightly when they arrived, the cost of vodka dropped significantly.