EARIE Exclusive: Can Inflation Make Consumers Less Price-Sensitive?

00:00:00: During periods of high inflation, consumers usually pay closer attention to prices or at least that is what we might expect.

00:00:08: But new research on the Austrian middle market points to a surprising effect as inflation increased consumers became less price sensitive.

00:00:17: How can changing consumer behavior help explain why retail prices and firms profit margins increase during the inflationary period?

00:00:26: On the occasion Fifty-third annual conference of the European Association for Research in Industrial Economics, or EUI.

00:00:35: ZDW economist Bernhard Gangelmeier is joined today by Alon Eisenberg, Associate Professor and a William Harbour Chair in Economics at the Hebrew University of Jerusalem to discuss these questions.

00:00:49: Welcome to the ZDw podcast Wirklich Wirtschaft!

00:01:00: A podcast of Leibniz Zentrums für europäische Wirtschaftsworschung in Mannheim.

00:01:25: I want to jump straight into your paper that you're going to present on Friday.

00:01:35: You study firm's pricing behavior, so the question of how much firms should charge above their costs.

00:01:42: and you do that in the Austrian milk market for that milk market?

00:01:45: You document that in two thousand twenty-two retail milk prices increased by about twenty five percent far exceeding The overall inflation rate in Austria.

00:01:56: that peak debt at about eleven percent.

00:01:59: You also document that retail prices increase more than wholesale prices, so firms increased their margins.

00:02:06: And the question we all kind of have is how does that happen?

00:02:10: How do you explain that pattern and explain that outcome in the

00:02:13: paper?".

00:02:14: Right!

00:02:14: So I guess this is predominantly why we focused on milk markets because people had such observations about many product categories.

00:02:24: there was these overall impression in the data that firms were enjoying higher profits and higher profit margins at the onset of inflation.

00:02:33: And there was much interest, trying to understand why this happens?

00:02:38: There are some claims that firms perhaps were exploiting the situation somehow taking advantage of the situation but it's not so easy make sense for that claimant to understand exactly what happened.

00:02:49: So the Austrian milk market.

00:02:50: for us, by the way this is joint project with Klaus Gugler and Lukas Pingbacher and Florian Schuchz.

00:02:59: The Austrian Milk Market provided an opportunity to observe all that action you mentioned in one product category And then we can use very fine-grained data To try understand how consumers behave In normal times or inflationary and try to make inference from that, then understand what happens.

00:03:21: The most important finding we have is that consumers actually changed their behavior in an important way... ...and less than intuitive ways.

00:03:31: What I mean is that they became less price-sensitive as inflation set in the year twenty one or twenty two years ago.

00:03:39: How can this be?

00:03:40: We would expect consumers to become more price sensitive where everything becomes expensive.

00:03:46: And, you know possibly I need to protect myself from that.

00:03:49: Price sensitivity is this mechanism where i enter the store and see there's a price of some product increased... ...and then say well should they consider some alternatives instead?

00:04:00: It turns out in inflationary times you may actually be doing less than that.. ..and it's a bit surprising but makes sense because its consistent with some economic theory.

00:04:11: because what I really care about is the relative prices.

00:04:16: Not just how much more expensive this product is, but by how much it became relatively other stuff.

00:04:24: and when inflation is upon us we basically kind of realize that everything becomes more expensive That entire price system become more noisy.

00:04:33: It's difficult for me to learn from these observations of the price that I just obtained, and so i'm basically going to most of the time just ignore that information.

00:04:43: Just buy the product kind of ignore the fact that it became more expensive because i'm not sure that it's worth the trouble to try and find alternatives.

00:04:50: probably they are also more expensive and so on.

00:04:55: now once you have consumers who are less price sensitive then uh you know whatever the firm is doing.

00:05:00: it becomes much easier not only to charge higher prices but It looks like a less competitive environment, but it's basically driven by that.

00:05:11: So if you try to explain the twenty-five percent increase in price then this diminished price sensitivity... You obviously have these cost channels and they become more costly for milk production.

00:05:25: That explains about maybe fifty per cent of the effect.

00:05:29: But thirty per cent can be explained by consumers becoming less price sensitive, which is quite an interesting finding for us.

00:05:39: We were not sure what we are going to

00:05:40: find.".

00:05:41: What's fascinating?

00:05:42: Explain if this increase in these price margins had nothing to do with market structure then... And we've seen a good amount of literature and recent years showing increases in price markups by firms across the board all over the globe in various different countries and jurisdictions.

00:05:59: but it's market structure, how should we interpret these empirical patterns?

00:06:04: What do they tell us.

00:06:06: Okay yeah so here I get to the downside of focusing on a specific case study... So what i can tell you is true for milk in Austria which is awesome but it's just milk and Austria right!

00:06:17: The phenomenon of higher markups at the onset of inflation was widespread And there are various explanations floating around, among them explanations that have to do with firm conduct.

00:06:29: With firms competing less aggressively perhaps using this inflationary environment too maybe even tacitly collude and things like that.

00:06:36: so we don't find evidence for that in the specific market that we study.

00:06:41: but I cannot tell you that we will not find such evidence.

00:06:43: another markets i think of inflation In general as these kind unfortunate phenomenon, but also as a lab because it's a macroeconomic force.

00:06:54: It hits many markets exogenously, so you can now look at specific market and examine how different markets respond.

00:07:04: I will not be shocked if in some markets firms did get away with less aggressive competition under the veil of inflation.

00:07:15: In our study we didn't find evidence.

00:07:17: That's

00:07:18: fascinating.

00:07:19: I hope that next year is Erie, we'll see a couple of more papers either coming from your team or some other researchers who get expired by our presentation on Friday.

00:07:27: looking at these are the markets in some other countries.

00:07:30: thinking about Erie Do you remember first Erie?

00:07:33: Or one Erie conference which stood out most?

00:07:36: Yeah so there have actually been quite few wonderful Eries.

00:07:41: i think it stands out for me as well but I'm not talking three years ago.

00:07:47: I am talking like ten years or more, who knows?

00:07:50: And...I remember that because it might have been my first Erie thing and was in Rome.

00:07:59: we had a fantastic experience of touring the city together.

00:08:04: It really registered with me But you know..I keep coming back.

00:08:11: Very good.

00:08:12: What's your personal highlight here for this year's Erie?

00:08:14: The personal highlight, as always is just to meet all these new faces and familiar faces.

00:08:22: So you get to see... so yesterday I attended one of the rising star sessions.

00:08:27: These are always exciting.

00:08:28: You can see that there's a lot more stuff coming out And then we also met some people who have worked with them People whom they want to work with.

00:08:39: It was such an amazing social environment.

00:08:42: The venue here is great You know, you get a lot of opportunities to chat in between the sessions.

00:08:49: I think it's a good mix yeah.

00:08:51: so all-in-all i think its social interaction...you can access any amount information today from your computer at home.

00:08:58: It is just not same as meeting people and person.

00:09:01: The Palace serves us wonderful backdrops this year conference as well.

00:09:05: Allo!

00:09:06: Its been great pleasure.

00:09:07: Thanks for chatting with me.

00:09:09: Enjoy rest of the Conference And enjoy the rest of your stay in Monheim.

00:09:12: Appreciate it.

00:09:12: Thank you

00:09:13: And thank you everyone for listening.

00:09:15: This was the ZDV podcast Wirklich Wirtschaft with Alon Eisenberg from Hebrew University of Jerusalem, recorded on the occasion after the twenty-twenty six EURI annual conference in Mannheim.

00:09:26: You can find more information about a conference and research at ZDW on our website, zdw.de As well as In The Show Notes & Our Social Media Channels.

00:09:36: Thankyou For Listening!

00:09:37: See you next time.