You may not have noticed, but we’re in the middle of an undeclared grocery price war in the Twin Cities metro area. The two principal low-cost food chains are advertising and discounting heavily.
This engenders responses on the part of consumers that are fascinating to observe, but poorly explained by economic theory.
Everyone has a relative who’ll drive 30 miles to buy five cans of soup that are a dime each cheaper than cans at the store five blocks away. And many of us know a fellow who boasts about finding a car dealer in rural Wisconsin or North Dakota who sells new cars at $50 above dealer cost.
Then there are the inveterate coupon clippers and rebate mailers. Meanwhile, there are shoppers like my bachelor son, who go to the closest grocery store and plunk down cash for the breakfast cereal and junk food that seems to compose much of their diets without even looking at a single price label.
Do all of these different shopping styles make sense, and how can economists explain the differences?
The key to remember is that most economic theory is based on the assumption that people make choices so as to maximize the satisfaction they get in life. But different things cause different kinds and different levels of satisfaction for different people.
At the introductory level, economics students are taught that “utility” or satisfaction maximization is essentially the same as income maximization. People make choices about what work they do and what they spend money on, based on getting the most money for their effort and the most satisfaction possible per dollar spent.
Following this conventional view, shoppers look for deals because they’re rationally trying to get the most for their money. If one can save money by clipping coupons or driving to different supermarkets to stock up on the week’s specials, it’s a simple case of getting the most product for one’s hard-earned dollars.
Searching for deals takes time, and different people place different values on their time. Retailers recognize this and “price discriminate” to maximize revenues given that some people are more price sensitive than others are.
My son has an active work and social life, and saving $1 on a box of cereal is low on his list of priorities. Grocery stores set prices high so that shoppers like him pay full fare, so to speak. But they offer coupons and weekly specials to attract those people to whom price is important and who have the time to clip the coupons and search all the ads in the Sunday paper.
Such price discrimination is essentially the same as senior citizen discounts at eateries or vastly different fares for air travelers.
But while price discrimination partially explains weekly specials and coupons, it doesn’t explain why Aunt Minnie will drive 50 miles to Mankato to buy jar lids for a dime off or why it takes cousin Harold seven hours to drive to the cabin because he has to stop and dicker at every Chevy dealer between Edina and Osakis.
To understand this behavior, one has to realize that for many people, shopping isn’t just a means to an end, but an end in itself.
Simplistic economic theory supposes that people shop to get things they want or need. It is these goods and services that provide satisfaction.
But the very process is enjoyable for many people.
For some women, going out to look for clothing with a friend or relative can be a pleasant social interaction and a chance to indulge fantasies of glamour.
For men, examining the table saws at Sears or the latest four-wheel drive pickup can provide the same pleasant indulgence.
Depending on upbringing and preferences, getting a “bargain” may bring special internal rewards. Perhaps Aunt Minnie grew up in the Depression when her family was badly stretched to make ends meet. Saving a dollar on canning lids or a few cans of peas reassures Minnie that she is a thrifty person, something that one ought to be.
Cousin Harold enjoys buying the next family sedan cheaply so that he can tell the rest of the office about his prowess around the watercooler. Like the primeval hunter who speared the mastodon and is feted afterward by the tribe, his bringing home the great deal wins the recognition of friends and neighbors.
Sometimes the symbolic value of thrifty shopping can assuage guilt.
The overtaxed woman trying to have it all feels guilty because the family ate takeout four times in the past week. If she goes out on Saturday and buys the chuck roast and seedless grapes that are on special, she reassures herself that she is successful at taking care of her family.
It is easy to wax cynical about human behavior. The key is that buying things is an activity that, by itself, produces satisfaction or dissatisfaction separate from that associated with the goods or services purchased.
Sometimes it takes a while to figure things out, but human beings still generally maximize satisfaction.
In the meantime, I have to get out to the used industrial machinery places in Hopkins. I really need some more lathe tooling to finish this important project I am working on.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.