This paper shows that the products and prices offered in markets are correlated with local income‐specific tastes. To quantify the welfare impact of this variation, I calculate local price indexes micro‐founded by a model of non‐homothetic demand over thousands of grocery products. These indexes reveal large differences in how wealthy and poor households perceive the choice sets available in wealthy and poor cities. Relative to low‐income households, high‐income households enjoy 40 percent higher utility per dollar expenditure in wealthy cities, relative to poor cities. Similar patterns are observed across stores in different neighborhoods. Most of this variation is explained by differences in the product assortment offered, rather than the relative prices charged, by chains that operate in different markets.

We explore the impact of rising incomes at the top of the distribution on spatial sorting patterns within large U.S. cities. We develop and quantify a spatial model of a city with heterogeneous agents and non-homothetic preferences for neighbourhoods with endogenous amenity quality. As the rich get richer, demand increases for the high-quality amenities available in downtown neighbourhoods. Rising demand drives up house prices and spurs the development of higher quality neighbourhoods downtown. This gentrification of downtowns makes poor incumbents worse off, as they are either displaced to the suburbs or pay higher rents for amenities that they do not value as much. We quantify the corresponding impact on well-being inequality. Through the lens of the quantified model, the change in the income distribution between 1990 and 2014 led to neighbourhood change and spatial resorting within urban areas that increased the welfare of richer households relative to that of poorer households, above and beyond rising nominal income inequality.

We study the causes of “nutritional inequality”: why the wealthy eat more healthfully than the poor in the United States. Exploiting supermarket entry and household moves to healthier neighborhoods, we reject that neighborhood environments contribute meaningfully to nutritional inequality. We then estimate a structural model of grocery demand, using a new instrument exploiting the combination of grocery retail chains’ differing presence across geographic markets with their differing comparative advantages across product groups. Counterfactual simulations show that exposing low-income households to the same products and prices available to high-income households reduces nutritional inequality by only about 10%, while the remaining 90% is driven by differences in demand. These findings counter the argument that policies to increase the supply of healthy groceries could play an important role in reducing nutritional inequality.