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
Date Written: August 26, 2012
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
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