Marginal Revolution: Who pays the highest prices?

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Who pays the highest prices?

I do, it seems. Don't tell my suppliers, but I am a big fan of zero price search. Mark Aguiar and Erik Hurst write:

Using scanner data and time diaries, we document how households substitute time for money through shopping and home production. We find evidence that there is substantial heterogeneity in prices paid across households for identical consumption goods in the same metro area at any given point in time. For identical goods, prices paid are highest for middleaged, rich, and large households, consistent with the hypothesis that shopping intensity is low when the cost of time is high. The data suggest that a doubling of shopping frequency lowers the price paid for a given good by approximately 10 percent. [TC: is that all????] From this elasticity and observed shopping intensity, we impute the shopper’s opportunity cost of time, which peaks in middle age at a level roughly 40 percent higher than that of retirees [emphasis added]. Using this measure of the price of time and observed time spent in home production, we estimate the parameters of a home production function. We find an elasticity of substitution between time and market goods in home production of close to 2. Finally, we use the estimated elasticities for shopping and home production to calibrate an augmented lifecycle consumption model. The augmented model predicts the observed empirical patterns quite well. Taken together, our results highlight the danger of interpreting lifecycle expenditure without acknowledging the changing demands on time and the available margins of substituting time for money.

Here is the paper, and thanks to Bruce Bartlett for the pointer. We also learn that people with children pay higher prices (presumably they have less time to search) and people in their forties with children pay the highest prices of all, six to eight percent more than people in their twenties or sixties.

I also take these results to imply that poor households, which shop more frequently and pay lower prices, are better off in material terms than CPI-based measures of real income will imply. That being said, they also have less time. Fans of the "happiness literature," which suggests more money above a certain level doesn't make you better off, should favor less search. After all, we are told that people enjoy time spent with friends more than either money or sex. So does this view (not mine) suggest that we shut down discount outlets and induce more consumption of time? Are single price monopolies better than price discrimination? Is Marshall's the true enemy of the middle class?

Posted by Tyler Cowen on December 15, 2005 at 06:33 AM in Data Source | Permalink

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While, I find the basic story reasonable for the time period in which the data was collected - 1993 - 1995 (see page 6), I don't think it captured the discount revolution. For example the Super Walmart where I lived at the time (Blacksburg VA) didn't open until 1996.

Specifically, I suspect that the discount revolution has saved the lower income bracket both time and money. With so many low priced items under the same roof (why do I suddenly feel like a commercial?) many more items are purchased in a single trip, thus reducing the total number of required shopping trips.

Further, I suspect that Walmart (and some other discounters) has low enough prices that the need to comparison shop for groceries (the primary focus of the paper) is lost. (I hasten to add that since the study was released Walmart went from virtually no grocery sales to being the #1 national chain for grocery sales which further dates the study.)

In the pre-discount store model, lots of grocery stores rotated their loss leaders around (and still do), so there was significant incentive to shop several stores to purchase the loss leaders. To some extent, Walmart has ended this shopping around effect as well as their prices are consistently low enough that there's little value to be gained by massive comparison shopping - further reducing time consumption.

So in addition to obviously costing everyone money, I suspect because of the period studied that shutting down discount outlets will also end up costing everyone time thus defeating the goal of the initiative.

Posted by: Jody at Dec 15, 2005 7:58:04 AM

Jody is right that Walmart reduces shopping around. But (1) Walmarts are often farther away from homes than other (smaller or less discounted) stores, in part due to their original rural locations, and in part due to covering a larger terrority per store in urbanized areas
(2) Walmarts have long lines, crowds, and other time-draining hassles and (3) Walmarts are not the cheapest for every good; they often use pricing tricks like having prominently displayed cheap TV's, but prices for better TV's that are higher than competitors. So, there is still a price benefit to shopping around.

Note that Walmart is rapidly opening new stores, especially in urban areas. Presumably they understand that people are currently paying higher time costs to drive to Walmart than to drive to grocery stores and other discounters.

Posted by: DK at Dec 15, 2005 8:30:23 AM

For God's sake, Tyler,

"and people with children in their forties pay the highest prices of all, six to eight percent more than people in their twenties or sixties."

is what you want, not people who have 40-year-old children. One thing you used to be able to count on (always) is that MR is a well-written blog...

Posted by: MK at Dec 15, 2005 9:08:53 AM

DK: My main point is that we should be very hesitant to draw any present-day conclusions from the study as its time period (93-95) misses the discount revolution which I believe has dramatically reshaped shopping patterns.

I believe the piece in terms of income brackets and time required to shop, the article is only useful as a lesson in economics history. (I do believe the effect of children should still hold, though.)

Flipping your point around: Who shops for high quality items at Walmart? Not the lower income brackets who can't afford them if we're assuming they're discriminating shoppers as implied in the piece. Parents sans time maybe, but higher income brackets wouldn't be shopping for high quality items at Walmart either - they'll be in other shops.

Because Walmart (nor any single nor any handful of stores) doesn't do a good job of pricing the high end market and because higher end products are bought more by people in higher income brackets, I suspect it is now the upper income brackets that spends more time shopping. While I think this effect would be very small in groceries (the focus of the paper), I think for goods beyond groceries (e.g., clothes, furniture, and TVs), the effect will be more pronounced.

To give an example of how the time-price consumption effects may have flipped, consider the "substance of style" effects in groceries. Who shops more at farmers' markets, organic groceries, whole food stores, and low carb chains? Presumably because you can't get all the groceries you need to support the more stylistic lifestyle, the wealthier now must spend more time shopping. (Of course, these aren't equivalent items thus negating an assumption in the piece.) I should also note that this trend may also be short lived as I believe there is a growing tendency to use personal shoppers and personal chefs (who both shop and cook) thereby trading off money for time again.

So to summarize, a) the study is dated and we should be very hesitant to apply it to today, b) if we account for the discount revolution, things may change at the lower end, c) if we account for the substance of style revolution, things may change at the upper end (but then different items will be bought between brackets), d) parents will still probably be the most likely to spend money to save time (maybe we should give them a tax break or something? Oh wait, we already do).

Posted by: Jody at Dec 15, 2005 9:27:56 AM

If we were to shut down the discount outlets, how would my mother and aunt consume their time?

I would consider the possibility that many middle-aged women who shop with their friends and family derive utility from the shopping experience itself as entertainment (the thrill of the hunt) and social time, as well as from the possibility of identifying lower prices or a more desirable substitute.

In the end, however, Marshalls may actually be the enemy, at least of the middle class budget and domestic harmony: funds are diverted from retirement savings to "homewares" and knick-knacks which clutter every corner and generally drive my father insane.

Clearly this effect does not hold for mundane grocery purchases. I'd imagine the time spent on "shopping intensity" (and not just physically putting goods in a cart) by middle-aged, rich shoppers is probably focused on big-ticket items and luxury goods (internet price comparisons of electronics?) rather than needs, like groceries. This paper does not seem to take internet shopping into account. Could it be that time which would be spent clipping coupons and comparing in-store brands to find the lowest price for groceries is more effectively employed finding cheaper airfares or a lower price on a laptop?

We have to be careful not to confuse "Number of shopping trips undertaken by the household" (Aguiar and Hurst's time metric) with actual shopping intensity...

Posted by: Alex Rixey at Dec 15, 2005 9:39:06 AM

I guess it pays to actually take a look at the data... 93-95 would pretty much eliminate the Internet effect, now wouldn't it...

I agree with Jody's comment about the dated-ness of the study. I'd like to see a similar study in the context of todays market.

Posted by: Alex Rixey at Dec 15, 2005 9:43:45 AM

This is a very interesting article. I think the last paragraphs on happiness are a little tortured though. I get a kick out of "happiness research" and think many people could be a little smarter about their goals, but I certainly wouldn't close stores.

My guess, based in part on observation of high-consumption 40-somethings, is that once people establish buying patterns based on the high opportunity cost of time, it becomes part of the routine. It isn't that paying X for Y is a conscious bid for happiness. It's more likely an unconscious action made while thinking about something else.

Amusing example in miniature I know some busy 40-something parents, they have a real "tennis family." I was amused to see commercial "ball and string" combinations hanging in their garage (the things to show you how far to pull in). If anyone has 100 used tennis balls laying around, it is them. Why buy? It's gotta be that buying pattern in action.

Posted by: odograph at Dec 15, 2005 10:21:39 AM

BTW, on Costco type stores ... how many times have you heard "I can't get out of that store for less than $XXX?" If I recall correctly from "Trading Up" (great book), Costco attracts on price but has become the nation's highest volume seller of premium wine. One shopping trip satsifies time pressure, a desire for frugality, and an opportunity for self-reward.

Posted by: odograph at Dec 15, 2005 10:27:17 AM

My wife will spend an hour trying to find the cheapest price on a $10 toy. I'm no better, I read "hot deals" forums to save a few $ here and there. Just last week I was rolling my own coins instead of bringing them to Coinstar - that is a reliable sign of an obsessed person, and I vow never to do it again. (I used to "throw" my pennies because I imagined it would be fun for children to find them, but people have convinced me this is littering.)

Sure, we're relatively poor, but it still strikes me as an inefficient use of time, especially while dirty dishes are still sitting in the sink.

I'm very thankful for sites like Froogle or Pricescan or the Orbitz flight matrix.

Posted by: Paul N at Dec 15, 2005 10:37:45 AM

I suppose that you should consider my old article inquiring about sex re-submitted with "time with friends" substituted for "sex".
Frankly I'm surprised people didn't rate sex higher even if they were lying. I would think that not doing so would be somewhat embarrassing.

Posted by: michael vassar at Dec 15, 2005 11:21:10 AM

Maybe we need to take this discussion in a different direction.

The thought that occurs to me in this is that economist give "leisure"
zero value in economic models. So, for example, someone that decides to take an
extra day off is always worse off because of this. Alternatively,
we argue that Europeans taking an extra week of vacation cuts their
standard of living.
But if you gave leisure a value, we would not automatically reach the
same conclusion. We might, but we may not either.

Posted by: spencer at Dec 15, 2005 11:32:58 AM

We're wierd; we have a housekeeper and gardener to "buy time" - they come every two weeks - but we do shop carefully and my wife peruses the local junkmail for grocery store loss-leaders. We also take our lunches to work and do other small things to keep the "burn rate" down, on the theory that dimes turn to dollars...

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