Revisiting the Income Effect: Gasoline Prices and Grocery Purchases / Dora Gicheva, Justine Hastings, Sofia Villas-Boas.

Format:

Book

Author/Creator:

Gicheva, Dora.

Contributor:

National Bureau of Economic Research.

Hastings, Justine.

Villas-Boas, Sofia.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13614.

NBER working paper series no. w13614

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Revisiting the Income Effect

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

This paper examines the importance of income effects in purchase decisions for every-day products by analyzing the effect of gasoline prices on grocery expenditures. Using detailed scanner data from a large grocery chain as well as data from the Consumer Expenditure Survey (CES), we show that consumers re-allocate their expenditures across and within food-consumption categories in order to offset necessary increases in gasoline expenditures when gasoline prices rise. We show that gasoline expenditures rise one-for-one with gasoline prices, consumers substitute away from food-away-from-home and towards groceries in order to partially offset their increased expenditures on gasoline, and that within grocery category, consumers substitute away from regular shelf-price products and towards promotional items in order to save money on overall grocery expenditures. On average, consumers are able to decrease the net price paid per grocery item by 5-11% in response to a 100% increase in gasoline prices. Our results show that consumers respond to permanent changes in income from gasoline prices by substituting towards lower-cost food at the grocery store and lower priced items within grocery category. The substitution away from full-priced items towards sale items has implications for microeconomic discrete-choice demand models as well as for macroeconomic inflation measures that typically do not incorporate frequently changing promotional prices.

Notes:

Print version record

November 2007.