I do, it seems. Don’t tell my suppliers, but I am a big fan of zero price search. Mark Aguiar and Erik Hurst write:
Using scanner data and time diaries, we document how households substitute time for money through shopping and home production. We find evidence that there is substantial heterogeneity in prices paid across households for identical consumption goods in the same metro area at any given point in time. For identical goods, prices paid are highest for middleaged, rich, and large households, consistent with the hypothesis that shopping intensity is low when the cost of time is high. The data suggest that a doubling of shopping frequency lowers the price paid for a given good by approximately 10 percent. [TC: is that all????] From this elasticity and observed shopping intensity, we impute the shopper’s opportunity cost of time, which peaks in middle age at a level roughly 40 percent higher than that of retirees [emphasis added]. Using this measure of the price of time and observed time spent in home production, we estimate the parameters of a home production function. We find an elasticity of substitution between time and market goods in home production of close to 2. Finally, we use the estimated elasticities for shopping and home production to calibrate an augmented lifecycle consumption model. The augmented model predicts the observed empirical patterns quite well. Taken together, our results highlight the danger of interpreting lifecycle expenditure without acknowledging the changing demands on time and the available margins of substituting time for money.
Here is the paper, and thanks to Bruce Bartlett for the pointer. We also learn that people with children pay higher prices (presumably they have less time to search) and people in their forties with children pay the highest prices of all, six to eight percent more than people in their twenties or sixties.
I also take these results to imply that poor households, which shop more frequently and pay lower prices, are better off in material terms than CPI-based measures of real income will imply. That being said, they also have less time. Fans of the "happiness literature," which suggests more money above a certain level doesn’t make you better off, should favor less search. After all, we are told that people enjoy time spent with friends more than either money or sex. So does this view (not mine) suggest that we shut down discount outlets and induce more consumption of time? Are single price monopolies better than price discrimination? Is Marshall’s the true enemy of the middle class?
While, I find the basic story reasonable for the time period in which the data was collected – 1993 – 1995 (see page 6), I don’t think it captured the discount revolution. For example the Super Walmart where I lived at the time (Blacksburg VA) didn’t open until 1996.
Specifically, I suspect that the discount revolution has saved the lower income bracket both time and money. With so many low priced items under the same roof (why do I suddenly feel like a commercial?) many more items are purchased in a single trip, thus reducing the total number of required shopping trips.
Further, I suspect that Walmart (and some other discounters) has low enough prices that the need to comparison shop for groceries (the primary focus of the paper) is lost. (I hasten to add that since the study was released Walmart went from virtually no grocery sales to being the #1 national chain for grocery sales which further dates the study.)
In the pre-discount store model, lots of grocery stores rotated their loss leaders around (and still do), so there was significant incentive to shop several stores to purchase the loss leaders. To some extent, Walmart has ended this shopping around effect as well as their prices are consistently low enough that there’s little value to be gained by massive comparison shopping – further reducing time consumption.
So in addition to obviously costing everyone money, I suspect because of the period studied that shutting down discount outlets will also end up costing everyone time thus defeating the goal of the initiative.
For God’s sake, Tyler,
“and people with children in their forties pay the highest prices of all, six to eight percent more than people in their twenties or sixties.”
40-year-old children. One thing you used to be able to count on (always) is that
MR is a well-written blog…
If we were to shut down the discount outlets, how would my mother and aunt consume their time?
I would consider the possibility that many middle-aged women who shop with their friends and family derive utility from the shopping experience itself as entertainment (the thrill of the hunt) and social time, as well as from the possibility of identifying lower prices or a more desirable substitute.
In the end, however, Marshalls may actually be the enemy, at least of the middle class budget and domestic harmony: funds are diverted from retirement savings to “homewares” and knick-knacks which clutter every corner and generally drive my father insane.
Clearly this effect does not hold for mundane grocery purchases. I’d imagine the time spent on “shopping intensity” (and not just physically putting goods in a cart) by middle-aged, rich shoppers is probably focused on big-ticket items and luxury goods (internet price comparisons of electronics?) rather than needs, like groceries. This paper does not seem to take internet shopping into account. Could it be that time which would be spent clipping coupons and comparing in-store brands to find the lowest price for groceries is more effectively employed finding cheaper airfares or a lower price on a laptop?
We have to be careful not to confuse “Number of shopping trips undertaken by the household” (Aguiar and Hurst’s time metric) with actual shopping intensity…
This is a very interesting article. I think the last paragraphs on happiness are a little tortured though. I get a kick out of “happiness research” and think many people could be a little smarter about their goals, but I certainly wouldn’t close stores.
My guess, based in part on observation of high-consumption 40-somethings, is that once people establish buying patterns based on the high opportunity cost of time, it becomes part of the routine. It isn’t that paying X for Y is a conscious bid for happiness. It’s more likely an unconscious action made while thinking about something else.
Amusing example in miniature I know some busy 40-something parents, they have a real “tennis family.” I was amused to see commercial “ball and string” combinations hanging in their garage (the things to show you how far to pull in). If anyone has 100 used tennis balls laying around, it is them. Why buy? It’s gotta be that buying pattern in action.
My wife will spend an hour trying to find the cheapest price on a $10 toy. I’m no better, I read “hot deals” forums to save a few $ here and there. Just last week I was rolling my own coins instead of bringing them to Coinstar – that is a reliable sign of an obsessed person, and I vow never to do it again. (I used to “throw” my pennies because I imagined it would be fun for children to find them, but people have convinced me this is littering.)
Sure, we’re relatively poor, but it still strikes me as an inefficient use of time, especially while dirty dishes are still sitting in the sink.
I’m very thankful for sites like Froogle or Pricescan or the Orbitz flight matrix.
Maybe we need to take this discussion in a different direction.
The thought that occurs to me in this is that economist give “leisure”
zero value in economic models. So, for example, someone that decides to take an
extra day off is always worse off because of this. Alternatively,
we argue that Europeans taking an extra week of vacation cuts their
standard of living.
But if you gave leisure a value, we would not automatically reach the
same conclusion. We might, but we may not either.
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