Ketch(ing)up on Grocery Prices: Am I Getting a Good Deal?
Four AAEA members release new research in AJAE
When shopping for groceries or other products, it’s not uncommon to feel a twinge of uncertainty: is this a “good” price to pay? Am I getting a good deal? Despite the fact that we can all relate to this feeling, models in economics tend to ignore the phenomenon.
In a new paper release in the American Journal of Agricultural Economics, “Am I Getting a Good Deal? Reference-Dependent Decision Making when the Reference Price is Uncertain” Vincenzina Caputo from Michigan State University, Jayson Lusk from Purdue University, and Rodolfo Nayga from the University of Arkansas explore how people shop and respond to price changes, and when they question whether or not they are getting a “good” deal.
Caputo says, “The amount consumers are willing to pay for a product does depend on what they expect the price to be. We find consumers are much more sensitive to changes in prices above this expected reference point than they are to changes in prices that are lower. Uncertainty about expected prices decreases the odds of buying anything and diminishes the impact of reference points. Differences across food products were found. In the case of the more frequently purchased goods like milk, consumers are more certain about their reference prices. This leads them to be more sensitive to changes in prices and use market prices to reinforce their reference prices. In the case of the less frequently purchased goods such as ketchup, consumers are more uncertain about their reference price and hence are more likely to adjust it to the prices they encounter during shopping. That is; when the reference price is highly uncertain, the effect of the reference price diminishes.”
The authors conclude that, "With the ongoing developments regarding tariffs on agricultural products imported by the US, consumer reference prices could become lower than the expected market prices. The higher volatility in market prices can exacerbate reference price uncertainty, which could then result in greater than expected demand responses. This highlights the importance of including reference price uncertainty in demand estimation to better inform the policy arena.”
The article is available online for a limited time. If you are interested in setting up an interview with Caputo, please contact Allison Scheetz in the AAEA Business Office.
ABOUT AAEA: Established in 1910, the Agricultural & Applied Economics Association (AAEA) is the leading professional association for agricultural and applied economists, with 2,500 members in more than 60 countries. Members of the AAEA work in academic or government institutions as well as in industry and not-for-profit organizations, and engage in a variety of research, teaching, and outreach activities in the areas of agriculture, the environment, food, health, and international development. The AAEA publishes two journals, the American Journal of Agricultural Economics and Applied Economic Perspectives & Policy, as well as the online magazine Choices and the online open access publication series Applied Economics Teaching Resources. To learn more, visit www.aaea.org.
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