Small price differences at the point of purchase can be highly effective in shifting consumer demand from high calorie to healthier alternatives, researchers including those of Indian-origin have found.
Low income consumers, who disproportionately suffer the consequences of obesity, are particularly responsive to such small price differences across products. Such differences are important because they mimic a “fat tax.”
The results are based on a large-scale field study analysing six years of sales data from over 1,700 supermarkets across the US.
The study focused on a peculiar pricing pattern of milk in the US, where relative prices for milk across fat content – whole, 2 per cent, 1 per cent and skim – vary depending on where you live and which store you happen to patronise.
At some stores, prices are equal across all fat content; at others, prices decrease with fat content, with whole milk the most expensive and skim the cheapest option.
“The question that comes to mind is whether these different price structures have an impact on people’s choices. To put it simply, do people switch to lower fat milk for a price difference as small as 15 cents per gallon?” said Romana Khan from the Northwestern University in US.
“The answer to this question is of interest because it relates to the hotly debated issue of whether a ‘fat’ or ‘sugar’ tax can be an effective mechanism to curb obesity,” said Khan.
The study finds that in markets where milk prices are equal across fat alternatives, people tend to choose whole milk over lower calorie alternatives, particularly in low income zip codes: at equal prices across fat content, the market share of whole milk is 52 per cent in lower income areas compared to 25 per cent in higher income areas.
Although the average price difference for a gallon of milk is just 14 cents (5 per cent), it causes a significant shift in market share away from whole milk to lower-fat options.
This shift to the lower calorie options is significantly more pronounced in low-income neighbourhoods.
Besides income, the analysis accounts for other factors such as age profile, racial mix, and educational attainment of the local customer base.
A critical factor in the analysis is that the prevailing price structure – whether prices across fat content are the same or not – is determined by the chain’s policy at the regional level and does not vary with local demographics or competition.
“This provides us with a quasi-experimental setup to analyse how small price differences impact people’s choices,” said Kanishka Misra from the University of Michigan.
“Our results have significant implications for health experts and policy makers, since interventions in the form of taxes on high calories foods are highly contentious,” said Vishal Singh of New York University.
The study was published in the journal Marketing Science.