Does price elasticity vary with economic growth? a cross-category analysis

Brett R. Gordon*, A. V I Goldfarb, L. I. Yang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

41 Scopus citations

Abstract

How does price sensitivity change with the macroeconomic environment? The authors explore this question by measuring price elasticity using household-level data across 19 grocery categories over 24 quarters. For each category, they estimate a separate random coefficients logit model with quarter-specific price response parameters and control functions to address endogeneity. This specification yields a novel set of 456 elasticities across categories and time that are generated using the same method and therefore can be directly compared. On average, price sensitivity is countercyclical: It rises when the macroeconomy weakens. However, substantial variation exists, and a handful of categories exhibit procyclical price sensitivity. The authors show that the relationship between price sensitivity and macroeconomic growth correlates strongly with the average level of price sensitivity in a category. They examine several explanations for this result and conclude that 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.

Original languageEnglish (US)
Pages (from-to)4-23
Number of pages20
JournalJournal of Marketing Research
Volume50
Issue number1
DOIs
StatePublished - Feb 2013

Keywords

  • Business cycle
  • Consumer packaged goods
  • Cross-category
  • Price elasticity

ASJC Scopus subject areas

  • Business and International Management
  • Economics and Econometrics
  • Marketing

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