Featured Research

from universities, journals, and other organizations

How higher gas prices affect consumer behavior

Date:
May 12, 2011
Source:
Brown University
Summary:
An economist used gasoline purchasing data to show how consumers make buying decisions when prices jump at the pump. When gas prices went up people behaved as if they were much poorer, buying cheaper gasoline -- as if a $2 increase in gasoline prices had decreased their annual income by tens of thousands of dollars.

Brown University economist Justine Hastings uses gasoline purchasing data to show how consumers make buying decisions when prices jump at the pump.

A dollar is a dollar is a dollar, so goes the economic theory of fungibility. But do people really act that way? In a new working paper, Brown University economist Justine Hastings and Jesse Shapiro of Chicago Booth School of Business find striking evidence that basic consumer choice behavior violates this bedrock theory.

"Fungibility is an important assumption in many economic models, but we have a lot of laboratory evidence suggesting that people don't, in fact, treat a dollar as a dollar," said Hastings, associate professor of economics. "People instead try to manage their budgets based on rules of thumb, which is a divide-and-conquer strategy."

Otherwise known as "mental accounting," that strategy means households often budget things like rent money, gas money, and grocery money separately. While a significant body of laboratory and experimental evidence shows that households maintain mental budgets, Hastings says that until now, it's been tough for economists to demonstrate this model of consumer behavior in the real world.

In their paper, "Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks," Hastings and Shapiro analyzed individual-level data on purchases of gasoline from a large grocery chain from January 2006 through March 2009. A clear pattern emerged: People behaved as if they were much poorer, buying cheaper gasoline as if a $2 increase in gasoline prices had decreased their annual income by tens of thousands of dollars.

Does this behavior go beyond the pump? Because some customers held retailer loyalty cards with the grocery store, Hastings and Shapiro were able to track other purchases. They looked at sales of half-gallon cartons of orange juice. They found that while customers were drastically scaling back from premium to regular gasoline, this behavior did not spill over into drastically different orange juice purchases. Gasoline prices affect orange juice purchases in the same way that changes in income do.

Hastings says this real-life demonstration of mental accounting isn't just about gasoline. "It uses gasoline to make a more technical, deeper point about economic behavior and modeling, and I think that's important for everything from macro- to micro-economic models."

As for what to expect this summer, a season when gasoline prices typically jump, Hastings says gas prices could eat into the nation's economic recovery.

"There is actually an overall income effect for non-gas purchases. While people may overreact with mental accounting and what types of grade gasoline they will purchase, there's not much they can do to save money on the gasoline purchasing margin," she said.

In prior work using similar data, Hastings (and co-authors D. Gicheva and S. Villas Boas) examined the regular income effect of gasoline prices on non-gasoline purchases and showed that households move expenditures in categories from restaurants to grocery purchases to make up for decreased income. The higher gas prices get, the less disposable income there is for other goods and services, and "that could really eat into an already strained economy."


Story Source:

The above story is based on materials provided by Brown University. The original article was written by Deborah Baum. Note: Materials may be edited for content and length.


Cite This Page:

Brown University. "How higher gas prices affect consumer behavior." ScienceDaily. ScienceDaily, 12 May 2011. <www.sciencedaily.com/releases/2011/05/110512132426.htm>.
Brown University. (2011, May 12). How higher gas prices affect consumer behavior. ScienceDaily. Retrieved August 20, 2014 from www.sciencedaily.com/releases/2011/05/110512132426.htm
Brown University. "How higher gas prices affect consumer behavior." ScienceDaily. www.sciencedaily.com/releases/2011/05/110512132426.htm (accessed August 20, 2014).

Share This




More Science & Society News

Wednesday, August 20, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Do More Wedding Guests Make A Happier Marriage?

Do More Wedding Guests Make A Happier Marriage?

Newsy (Aug. 20, 2014) A new study found couples who had at least 150 guests at their weddings were more likely to report being happy in their marriages. Video provided by Newsy
Powered by NewsLook.com
Charter Schools Alter Post-Katrina Landscape

Charter Schools Alter Post-Katrina Landscape

AP (Aug. 20, 2014) Nine years after Hurricane Katrina, charter schools are the new reality of public education in New Orleans. The state of Louisiana took over most of the city's public schools after the killer storm in 2005. (Aug. 20) Video provided by AP
Powered by NewsLook.com
Kids' Drawings At Age 4 Linked To Intelligence At Age 14

Kids' Drawings At Age 4 Linked To Intelligence At Age 14

Newsy (Aug. 19, 2014) A study by King's College London says there's a link between how well kids draw at age 4 and how intelligent they are later in life. Video provided by Newsy
Powered by NewsLook.com
Breakingviews: Ebola's Economic Impact Could Eclipse SARS

Breakingviews: Ebola's Economic Impact Could Eclipse SARS

Reuters - Business Video Online (Aug. 18, 2014) The virus ravaging Africa has yet to spread elsewhere. Yet Asia’s SARS crisis in 2003 showed how changes to behaviour can hurt the economy more than the actual disease, says Breakingviews' Una Galani. Video provided by Reuters
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins