Three essays on consumer behavior in commodity markets

He, Shan

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https://hdl.handle.net/2142/115528 Copy

Description

Title

Three essays on consumer behavior in commodity markets

Author(s)

He, Shan

Issue Date

2022-04-07

Director of Research (if dissertation) or Advisor (if thesis)

Fullerton, Don

Doctoral Committee Chair(s)

Fullerton, Don

Committee Member(s)

• Myers, Erica
• Lemus, Jorge
• Hong, Seung-Hyun

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

consumer shopping behavior, consumer mistakes, circular economy, one-stop-shopping convenience, firm scope, taxation.

Abstract

My dissertation investigates consumer shopping behavior, and it also evaluates how such consumer behavior would affect firm behavior or policy design. This dissertation consists of three chapters. The first and third chapters are my two independent empirical studies, and the second chapter is co-authored with Don Fullerton. In the first chapter, I estimate the extent to which consumers respond to energy costs when purchasing energy-using durables, when product-specific lifetime is provided and considered. Using market-level transaction data for lightbulbs, I compare consumer demand responses to the local annual energy cost versus the annual cost over the life of the appliance that has the same present value as the up-front purchase price – the “levelized annual cost of ownership” (LACO). I find consumers are significantly inattentive to energy costs when purchasing lightbulbs. This holds for “average” consumers and consumers across the income and education spectrum; and even holds under a wide range of assumptions on discount rates and durability, including two extreme cases in which consumers overestimate or underestimate the lightbulb lifetime. In addition, accounting for a specific lifetime provides significantly different estimates from those estimated using a fixed average lifetime. These findings have implications for information-based policies, and for subsidies for energy-efficient durables generally. In the second chapter, my co-author and I begin an economic analysis of consumer choices about product durability. The interdisciplinary circular economy literature recommends longer lasting products, in order to reduce pollution from extraction, production, and disposal. But standard economic analysis shows that optimal pollution taxes do not depend on product life. In this chapter, my co-author and I find conditions under which consumers choose lives that are too short – a “durability gap”. First, in our model, having a suboptimal preexisting output tax means that durability is suboptimal. We show that an increase in the output tax encourages purchase of more durable products and raises welfare. Second, in that case, welfare also is raised by a subsidy for durability or a marginally binding durability mandate. Third, the internalities or consumer errors we study have ambiguous effects. Fourth, we find that a social discount rate less than private discount rate is the strongest case for policy to favor durability. In the third chapter, I exploit a regulation that made it legal to sell liquor in retail stores to investigate the impact of adding product categories in a store on the sales of products in the same and competing stores. I find that stores, where buyers can purchase both liquor and non-alcohol products, are visited more frequently, consistent with the hypothesis of one-stop shopping convenience. Retail stores that introduced liquor benefit from business stealing from liquor sales and complementary non-alcohol categories. On average, sales of non-alcoholic products increase by 1.1 percent, tobacco sales increase by 3 percent, and total sales increase by 5 percent for stores that began selling liquor. Further, I find that the aggregate consumption for liquor increases, while for tobacco, it remains roughly constant, suggesting substitution of tobacco sales across stores.

Graduation Semester

2022-05

Type of Resource

Thesis

Copyright and License Information

Copyright 2022 Shan He

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