Cash-constrained households and product size

Storability constrains firms' ability to implement price discrimination, as it enables consumers to separate the timing of purchase from the timing of consumption. Scanner data, however, indicate that significant price differences exist for the same storable good and brand sold in containers of different sizes, with small sizes accounting for a larger share of purchases of low-income households than for their more affluent counterparts. Low-income households therefore tend to be less willing or less able to purchase large storable-good containers typically offered at "bulk prices," to realize savings per unit of consumption, subsequently consuming out of household inventory. We explore one potential explanation for this puzzle: the presence of "cash" constraints. We describe data patterns that are consistent with cash constraints being present, ruling out alternative explanations for this puzzle. To test for their presence and evaluate implications, we develop and estimate a dynamic discrete choice model that nests the possibility of cash constraints. The model is estimated using household-level data on purchases and shopping trips over an eleven-year period, beginning January 2001. We find that cash constraints are economically meaningful for low-income households, whereas less relevant for high-income households. Cash constraints further depend on the week of the month. We find that ignoring cash constraints underestimates the cross-price elasticity between products and overestimates the cross-price elasticity relative to the outside option. Hence, considering cash constraints is important during merger evaluations and antitrust analysis. Recognizing that some consumers will only consider offerings at specific price levels is important for manufacturers and retailers when they define their pricing strategies.