Does Price Elasticity Vary with Economic Growth? A Cross-Category Analysis

Journal of Marketing Research, 50(1), pp. 4-23, 2013.

69 Pages Posted: 27 Aug 2012 Last revised: 13 Nov 2013

See all articles by Brett R. Gordon

Brett R. Gordon

Northwestern University - Kellogg School of Management

Avi Goldfarb

University of Toronto - Rotman School of Management

Yang Li

Cheung Kong Graduate School of Business

Date Written: August 26, 2012

Abstract

How does price sensitivity change with the macroeconomic environment? We explore this question by measuring price elasticity using household-level data across 19 grocery categories over 24 quarters. For each category, we estimate a separate random-coefficients logit model with quarter-specific price response parameters, and control functions to address endogeneity. Our specification yields a novel set of 456 elasticities across categories and time that we generated using the same method and therefore can directly compare them. On average, price sensitivity is counter-cyclical — it rises when the macroeconomy weakens. However, substantial variation exists, and a handful of categories exhibit procyclical price sensitivity. We show the relationship between price sensitivity and macroeconomic growth correlates strongly with the average level of price sensitivity in a category. We examine several explanations for this result and conclude a category’s share-of-wallet is the more likely driver versus alternative explanations based on product perishability, substitution across consumption channels, or market power.

Keywords: Price elasticity, business cycle, consumer packaged goods, cross-category

Suggested Citation

Gordon, Brett R. and Goldfarb, Avi and Li, Yang, Does Price Elasticity Vary with Economic Growth? A Cross-Category Analysis (August 26, 2012). Journal of Marketing Research, 50(1), pp. 4-23, 2013.. Available at SSRN: https://ssrn.com/abstract=2136658 or http://dx.doi.org/10.2139/ssrn.2136658

Brett R. Gordon (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Avi Goldfarb

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8604 (Phone)
416-978-5433 (Fax)

Yang Li

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E2
One East Chang An Avenue
Beijing, Beijing 100738
China
+861085188858 (Phone)

HOME PAGE: http://english.ckgsb.edu.cn/?q=node/381

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