TY - JOUR AU - Gicheva,Dora AU - Hastings,Justine AU - Villas-Boas,Sofia TI - Revisiting the Income Effect: Gasoline Prices and Grocery Purchases JF - National Bureau of Economic Research Working Paper Series VL - No. 13614 PY - 2007 Y2 - November 2007 UR - http://www.nber.org/papers/w13614 L1 - http://www.nber.org/papers/w13614.pdf N1 - Author contact info: Dora Gicheva 53 Winchester Ave Apt. 1 New Haven, CT 06511 Tel: 203-606-1869 E-Mail: dora.gicheva@yale.edu Justine S. Hastings Brown University Department of Economics 64 Waterman Street Providence, RI 02912 Tel: 203/432-3714 Fax: 203/432-6323 E-Mail: justine_hastings@brown.edu Sofia Villas-Boas UC, Berkeley Department of Agricultural & Resource Economics 310 Giannini Hall CA 94720-3310 E-Mail: sberto@berkeley.edu AB - This paper examines the importance of income effects in purchase decisions for every-day products by analyzing the effect of gasoline prices on grocery expenditures. Using detailed scanner data from a large grocery chain as well as data from the Consumer Expenditure Survey (CES), we show that consumers re-allocate their expenditures across and within food-consumption categories in order to offset necessary increases in gasoline expenditures when gasoline prices rise. We show that gasoline expenditures rise one-for-one with gasoline prices, consumers substitute away from food-away-from-home and towards groceries in order to partially offset their increased expenditures on gasoline, and that within grocery category, consumers substitute away from regular shelf-price products and towards promotional items in order to save money on overall grocery expenditures. On average, consumers are able to decrease the net price paid per grocery item by 5-11% in response to a 100% increase in gasoline prices. Our results show that consumers respond to permanent changes in income from gasoline prices by substituting towards lower-cost food at the grocery store and lower priced items within grocery category. The substitution away from full-priced items towards sale items has implications for microeconomic discrete-choice demand models as well as for macroeconomic inflation measures that typically do not incorporate frequently changing promotional prices. ER -