Working Paper: NBER ID: w13614
Authors: Dora Gicheva; Justine Hastings; Sofia Villas-Boas
Abstract: 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.
Keywords: income effect; gasoline prices; grocery purchases
JEL Codes: E21; E31; L10; L16; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Gasoline Prices (N72) | Disposable Income (D31) |
| Gasoline Prices (N72) | Grocery Expenditures (D12) |
| Gasoline Prices (N72) | Food-away-from-home Expenditures (D12) |
| Disposable Income (D31) | Grocery Expenditures (D12) |
| Gasoline Prices (N72) | Net Price Paid per Grocery Item (D19) |
| Gasoline Expenditures (H59) | Grocery Spending (D19) |