How elastic is the demand for shopping bags? Depends on if you think those bags are free.

Demand for shopping bags is “extremely elastic” says Kellogg’s Marty Lariviere, commenting on the success of the District of Columbia’s recently imposed $.05 per shopping bag tax (on paper or plastic) to pay for cleaning the river. Already there’s been an average of 60 percent reduction in the number of bags handed out across retailers. Maybe the program is a failure then since it was designed to be a revenue generator and it’s not hitting its targets.

The river clean up fund had been anticipating raising over $3 million dollars this but has collected only $1.1 so far.

Lariviere chalks up the drop in bags to “social pressure”–presumably by environmentalists–as well as the low-cost of avoiding the $.05 tax (bring a bag!), but does this explain the huge drop in shopping bags taken. Bringing a bag was never an onerous task and $.05 per bag is still a drop in the bucket on a typical grocery bill. What seems at work here is a reference price of $0.00. Bags were always part of the grocery shopping experience and came to be part of the value a customer expected. With the new tax, customers couldn’t make proper comparisons to the cost of their old “free” bags because it wasn’t clear what those costs were. Lariviere notes that for some nice shopping bags the costs are well above $.05., so retailers are happy not to hand them out. But without making the price connection, customers felt nickel and dimed. And, as he argues, they could easily act on their outrage because the cost of avoidance is low.

Back to the first statement, though. Is shopping bag demand highly elastic? Here’s a thought experiment. Lots of stores sell shopping bags these days. Some of them, like card shops, even sell relatively plain bags with handles similar to what you would find at some grocery stores (like a Whole Foods). If the price of those bags went up $.05, do you think the demand would fall 60 percent? Another way to reinterpret Lariviere’s point is to say Yes, with the following caveat. Any once free good has a high elasticity when no longer free – even if the absolute price increase is tiny.

Writing the Journal of Marketing, Gadi Fibich, Arieh Gavious, Oded Lowengart devise a theory for this reference-dependent elasticity. Gated here.

The effect of reference price is most noticeable immediately after a price change, before consumers have had time to adjust their reference price. As a result, immediate-term price elasticity is higher than long-term elasticity, which describes the response of demand long after a price change, when reference price effects are negligible. Furthermore, because of the differential effect of gains and losses, immediate-term price elasticity for price increases and price decreases is not equal.

Caution: This argument is just a theory. But here’s another way to put it: When you suddenly realize there’s no such thing as a free lunch, that first paid one really hurts. Let’s see where shopping bag demand in the District is a year from now.

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  • janeejane

    It would be interesting to compare this situation with the UK where few shops charge for bags but many reward with extra loyalty points for bringing your own. It’s been like this for the past few years. Also beyond enviromentalists using your own material bag is just the norm for many since the 2007 Anya Hindmarch designed bags.

  • Ana Nelson

    Ireland has had a government levy on plastic bags for a few years. When it was first introduced, I remember seeing shoppers balancing 5 or 6 items in their hands rather than pay 15c for a bag. People then got used to bringing their own bags and many still do, however many people now simply see the fee as part of the cost of shopping and just pay it. My local shop is urban, small and convenience-oriented, so this is probably less true for large, suburban shops where people are doing larger, better-planned shopping for families.

    It would be great to see some data on this, maybe I’ll try to find some. However I believe the theory fits with my casual observations, and if the goal is to reduce plastic bag use then the levy needs to be adjusted over time to maintain the ‘sticker shock’ (as it is here – going up to 44c soon from its current level of 22c).

    I will say that plastic bag waste is down considerably (used to be a regular occurrence to have a plastic bag blow under one’s car, get stuck and melt/burn).

  • Vaid

    Dan Ariely describes an experiment in “Predictably Irrational” that gets at this issue pretty well, though from the opposite direction. He found that the demand for candy increases a LOT more if the price drops from 1 cent to FREE, than if it drops from, say 15 cents to 14 cents. The effect of FREE is pretty significant.

  • online coupons

    Its a nice post. Well there are so many stores in Uk and also in other countries, which provides these bags free of cost. But they put their logo or slogan etc on it. So they are using them also as a mean of advertisement.

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