This paper develops an equilibrium theory of expenditure inequality and price dispersion to study how retail prices respond to households' shopping behavior. The theory features incomplete markets, non-homothetic preferences, and equilibrium price dispersion for multiple varieties. Endogenous heterogeneity in the effort to search for prices shifts the price elasticity faced by retailers with the composition of demand. Retailers optimally charge higher margins for goods consumed by low-effort households. Predictions on the shape of price distributions are consistent with evidence from US scanner-data. Heterogeneity in search effort yields differences in prices paid for identical goods and reduces inequality in consumption relative to expenditure. The equilibrium response of posted prices across products doubles this direct effect of search on inequality. The model reconciles conflicting evidence on the cyclicality of retail markups and shows that the response of posted prices to a redistributive tax partially compensates net-contributors for their losses.

This paper examines the impact of banking sector losses on inequality in a quantitative model with income and portfolio heterogeneity among households and financial intermediation frictions. Consistent with U.S. data, the model predicts that low-income households are disproportionately affected. Their consumption declines significantly due to higher borrowing costs and labor income losses. High-income households are better insured through liquid assets. About 20% of them benefit from temporary asset price declines and higher future returns by adjusting their illiquid savings. These portfolio adjustments shape aggregate dynamics in the presence of financial frictions, by affecting the relative response of consumption and investment to aggregate shocks.