Title: Revisiting the income effect
Description: "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"--National Bureau of Economic Research web site.