Mental accounting: Gas edition

When the price of gas goes up, people switch from premium to regular. They don’t switch from Tropicana to private label orange juice. That’s the very narrow takeaway from Justine Hastings and Jesse Shapiro’s paper on how gas price changes affect other consumer purchases.

The larger takeaway is that consumers use various mental accounts to keep track of different purchases. When the price in one mental account increases, consumers don’t ease the pain of that loss by shifting purchases across a variety of other budgets. Instead they make more dramatic changes in their purchasing choices in the category with the price increase – hence, they switch gas grades. They end up acting as if they are poorer than they really are. That’s where the orange juice comes in.

Does this behavior go beyond the pump? Because some customers held retailer loyalty cards with the grocery store, Hastings and Shapiro were able to track other purchases. They looked at sales of half-gallon cartons of orange juice. They found that while customers were drastically scaling back from premium to regular gasoline, this behavior did not spill over into drastically different orange juice purchases. Gasoline prices affect orange juice purchases in the same way that changes in income do.

A pdf of paper is here. A link to summary of research is here.

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  • http://hoastoolshop.com Niklas Laninge

    Sounds like a study I want to read but the link to the pdf doesn’t work… 

  • http://twitter.com/pricingright Rags Srinivasan

     is it possible that choosing the higher grade was a mistake to begin with and when price increases, customers realize less utility from it? (takes back to choice based conjoint and part-utilities)

  • http://www.strategiesgroup.com/ Ava Venson

    Not only had it affected the sales of
    the orange juice. It also affected all the prices of commodities. So, others
    tend to switch to brands that cost lower but some others very much satisfied
    with their old brand, cut the quantity of their usual purchase, to stick to
    their budget. At times like these, it is really more on being a wise and a
    practical consumer.
     

  • http://twitter.com/smorgasbord smorgasbord

     Perhaps I’m being overly simplistic but isn’t this simply because the affects of cheaper gas are pretty intangible – you never *really* notice the performance change unless you’re monitoring the miles per gallon closely – the contrast between low-grade and high-grade juice however is immediately noticeable in the taste experience. Gas is something you can compromise on, there’s less friction in the change than there would be with your daily OJ. [Note: I haven't read the full paper, maybe this point is already made?]

  • Clay Campaigne

    This is relevant to real-time electricity pricing for small consumers.  Consumers don’t like huge amounts of payment risk (not just price, but price * quantity).  If you tried to account for this by hedging them against ex-post real-time prices times their ex-ante/expected quantity demanded (e.g. based on weather and similar consumers, to avoid moral hazard / baseline manipulation) and only exposed them on the margin to real time prices, they might not care enough to reduce optimally during high-price events, because they wouldn’t be hurting.  Getting a good quantity baseline is hard though anyway.

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    Very nice post ..,truly very informative thanks…….