Less is More Expensive: Income Differences in Bulk Buying
65 Pages Posted: 29 Oct 2019 Last revised: 26 May 2020
Date Written: April 16, 2020
Quantity discounts are an effective way for households to save money. I explore how large these quantity discounts are, how bulk buying differs by income, and how other factors affect the bulk buying decision. Using Nielsen’s granular store- and household-level data, I establish two empirical facts. First, quantity discounts are large for a wide range of products. Second, low-income households are less likely to buy in bulk than high-income households. I estimate that low-income households could reduce their grocery expenditures by 5%, saving an aggregate of $5.4 billion annually, if they bought in bulk to the same extent as high-income households. I augment Nielsen data with new data that I collected on state-level unit-price regulations and on warehouse club entry. I find that a combination of cognitive costs, store preferences, budget constraints,and storage costs discourage low-income households from realizing these savings. I then estimate a discrete choice model of household purchasing behavior to quantify how bulk buying changes when cognitive costs and storage costs are reduced. Counterfactual simulations show that mandating the display of unit prices, which has only been adopted by nine states, would reduce the difference in how often the highest- and lowest-income households buy in bulk by 26%.
Keywords: bulk discount, quantity discount, retail, cognitive constraints, storage costs
JEL Classification: D10, I30
Suggested Citation: Suggested Citation