Has the pandemic changed tastes (which change demand)?

See Worry, haste, retail therapy: What have we bought and why? by Leanne Italie of the AP.

It looks like some of it is an income increase (for some) who got refunds on things that got cancelled. Excerpts:

"The panic buying, the over-buying, the emotional buying aren't unique to this extraordinary world-shaking event, but it's the kind of world-shaking event that sent the world home with plenty of anxiety and few shopping options other than the online kind.

In the U.S., retail sales tumbled by a record 16.4% from March to April as business shutdowns caused by the coronavirus kept shoppers away, threatened stores and weighed down a tanking economy. The Commerce Department reported that a long-standing migration toward online purchases accelerated, posting an 8.4% monthly gain.

Measured year over year, online sales surged 21.6%.

“It's panic on lots of levels,” said Wendy Liebmann, CEO of WSL Strategic Retail, a global consulting firm specializing in retail strategy and shopper insights. “All of the traditional buying patterns are tossed up in the air.”

She called it “shopping chaos” with no anchors. And the chaos has come with some unique calculus.
One couple got to skip their last preschool payment due to lockdown and purchased the couch of their dreams."
"That “instant” feeling is key to much of the coronavirus shopping, said Jeff Galak, associate professor of marketing at Carnegie Mellon University’s Tepper School of Business.

“Shopping as therapy has been shown to reduce negative moods and boost overall happiness," he said. “The big downside, however, is that such relief is very short-lived. That good feeling very quickly dissipates.”

Galak said some research points to “shopping while bored” as a variation with less emotional payout.

“Browsing for things that one doesn’t need fills the time and then clicking `buy now' just naturally follows,” he said. “Consumers may find themselves on page 20 of a search result for a new pair of shoes, a place that when engaged and not bored, they would never reach.”"

When demand for one good falls (gasoline and ethanol) leads to an increase in price for other goods (beer and soda)

See A Coronavirus Chain Reaction: Less Driving Means Less Fizz for Sodas: Carbon-dioxide output is down, as the drop in gasoline demand slows fuel production by Vipal Monga of The WSJ.

I don't think I have heard of anything like this before. If the supply of carbon dioxide (an ingredient in soda and beer) falls, its price will rise. Then supply will decrease for beer and soda since the price of a resource used to make it has increased.

Excerpts:

"As the summer season approaches, consumers might end up paying more for their beer and soft drinks. The reason? The cost of the bubbles in the drinks is going up."

"Carbon dioxide is a byproduct of ethanol, which by federal mandate is mixed into gasoline to help it burn more cleanly. But fewer people are driving because of the Covid-19 lockdowns, and demand for gasoline has plunged, prompting ethanol plants to shut down. That has put pressure on the source for roughly 40% of all industrial carbon dioxide produced nationwide—a key ingredient for soft drinks and beers.

Carbon-dioxide production this year has fallen by roughly 30% from last year’s levels"

"A Coke spokeswoman said the North American drop in carbon-dioxide production is being balanced by less demand for soft drinks because many restaurants and sports stadiums are currently closed. “We do not foresee any concerns about supply at this time,” she said.

Bob Pease, president of the Brewers Association trade group, warned that brewers could soon start passing cost increases on to customers, especially as the return of restaurant demand in states such as Texas, Georgia and Wisconsin, which have eased lockdowns, strains gas supplies. “This shortage could become critical in short order,” he said."

We just had two straight months with the CPI falling at least 0.4% for just the fifth time since 1947

Seasonally adjusted data from the St. Louis Fed.

Here are the CPI numbers for the last 3 months

Feb.) 259.050
March) 257.953
April) 255.902

The drop for March was 0.42% while for April it was 0.795%.

Here are all the occurrences. We had three straight months in 2008. So that counts as two cases. Those all came in about the middle of the last recession.

Date	Change
Nov. 1948	-0.00617
Dec. 1948	-0.00455
Sep. 2006	-0.00491
Oct. 2006	-0.00444
Oct. 2008	-0.00860
Nov. 2008	-0.01771
Dec. 2008	-0.00823
Mar. 2020	-0.00423
Apr. 2020	-0.00795

A 0.7% or greater decrease for just one month has happened only six times since 1947. Three were in 2008, one in 1948 and one in 1949. The sixth is the one from this April.

Price discrimination and profit

A post last week dealt with price discrimination in the car insurance market. See You could be paying higher insurance premiums than someone with the same driving history, car and background because of price optimization.

Charging different prices to different groups of customers based on their ability and willingness to pay (a discount) is price discrimination. Buyers with a lower price elasticity of demand will be charged a higher price.

If the firm were to charge the same price to each group, they would actually make less profit since they would end up violating the rule which says "choose Q so that marginal revenue (MR) = marginal cost (MC)."

Suppose a firm has two groups of customers, A and B, shown below. Group A's demand is generally less elastic. The blue line is demand. Green is MR. The flat line is both MC and ATC (average total cost). Having ATC = MC is not realistic but it simplifies the explanation.

The darker red lines just show us how to find P and Q for each group. Profit is Q*(P - ATC).




Now group B


Group A profit) 8*(24 - 8) =128

Group B profit) 12*(20 - 8) = 144

Total profit = 128 + 144 = 272

What if they charge both groups 22?

Group A profit) 9*(22 - 8) =126  (at Q = 9, MR does not equal MC)

Group B profit) 10*(22 - 8) = 140 (at Q = 10, MR does not equal MC)

Total profit = 126 + 140 = 266

So there is less profit (266) if they charge the same price to each group than if the price discriminate (272).

Economist Robert P. Murphy gives an example of how there is nothing wrong with price discrimination:

"the granting of special pricing for certain groups need not harm the groups paying full freight.

For example, if a movie theater in a small town were barred from giving child, student, and senior discounts — and instead had to charge one ticket price for all customers — it might not be able to stay in business. It would hardly help the middle-aged adults to have a "fair" pricing policy with no theater in town. This example shows the pitfalls in thinking about "the cost" of providing a seat in a movie theater and deriving the "fair" price that a theater ought to charge all customers."

See The Economics of Coupons and Other Price Cuts

Also see Price Discrimination by Tejvan Pettinger. A key passage is:

"Price discrimination will enable some firms to stay in business who otherwise would have made a loss. For example price discrimination is important for train companies who offer different prices for peak and off-peak. Without price discrimination, they may go out of business or be unable to provide off-peak services."