As we all know, when the price of something goes up, we buy less of it. For some products, we’ll change our behaviour significantly (holidays or books, perhaps). For other products, we just grit our teeth, hand over the credit card, and don’t manage to cut down our consumption much. Petrol and cigarettes are the classic examples of this: what economists call “inelastic goods”.

The elasticity of petrol in New Zealand is estimated at around -0.15, which means that when the price goes up by 10%, we’ll only buy 1.5% less. That’s pretty inelastic! It’s often thought that New Zealand is much less responsive to petrol price changes than other countries, probably because we have such poor public transport, and are a spread out country. However, this may not be the case for all situations. Firstly, the petrol price rises over the last decade were almost unprecedented, and we may reach the point where petrol eats into our budgets so much that we simply have to cut down. Secondly, there have been some interesting changes in the last decade, including the introduction of petrol discount vouchers at supermarkets.

14 - Jun Weekly Breakdown 2

Petrol prices, 2004-2014. Ouch.

Supermarket petrol discount vouchers have been a fact of life for almost eight years, and they’re still widely used. Surveys by Canstar Blue show that almost 80% of Kiwis visit particular petrol stations based on their price promotions – although the surveys don’t say how often people use the vouchers.

So, people do seem quite willing to change their petrol buying habits based on these vouchers. That’s not a costless process – you might have to drive a bit further to get to the petrol station which accepts your voucher, which costs you time and a little bit of money. You also have to hang on to the vouchers, figure out which one is which, enter the code, wait a little longer at the till and so on. The thing is, though, for a voucher offering 4 cents off a litre, the discount on the pump price is only 1.8%. For 6 cents off, the discount is 2.7%. That’s pretty tiny, and most retail stores wouldn’t even bother advertising discounts this small. And yet, when applied to supposedly inelastic petrol, it can be pretty effective.

At the other end of the scale, Z Energy have very openly taken a different approach – they’ve steered away from heavy price discounting, and pitched themselves as offering better service instead. They’re targeting the customers who are happy to pay a few cents a litre if they get a better experience. No doubt that’s a sensible move, if the other big companies are positioning themselves in the price competition space.

So, what does this all tell us about consumer behaviour? Looking at elasticity figures across an entire country can be a little misleading. Within any customer group, there’ll be those who are more price sensitive and those who are less. The “holy grail” for any business is to figure out which is which, and charge the less “price sensitive” people more! Discount vouchers are one way of doing this, as the people who are most likely to bother with them are those who are the most sensitive to price. There’s probably a fascinating study hiding here – and we might find that Kiwi consumers are more complex than the old figures suggest.

Initially written for RCG’s News In Brief, original version here

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25 comments

  1. Correct me if I have misunderstood your discussion, but the change in purchasing behaviour as a result of petrol discount vouchers surely has little to do with the market elasticity of petrol in general. Elasticity measures how much consumption will change with a commodity price, and in the case of petrol we know this is not very much. On the other hand, discounts at particular outlets merely alter where people purchase from, not the amount they purchase. So I can’t see any relationship between discount vouchers and market-elasticity. (?)

    1. That’s a good point Dave, and you could be right, although it might be a question of semantics. I’d suggest that the willingness (or otherwise) of consumers to seek out a 4c discount indicates something about their price sensitivity, and therefore about their elasticity. But at the aggregate level, we’re obviously better off looking at how demand has changed in response to the much larger price changes that have occurred since 2004, say, coupled with some other explanatory variables such as GDP, population growth and so on.
      Still, it’d be interesting to look at this kind of data at the individual consumer level. You may be right, and perhaps this isn’t really about the elasticity of individuals. Maybe it’s more about how we can be quite irrational sometimes – maybe we drive for another 10 minutes to make a miniscule saving at the pump, or to find a carpark that we don’t have to pay for, whereas if we thought about it, we’d place a higher value on our time (or vehicle wear and tear, etc) and just go for the quickest option. And no doubt the people who use the vouchers do try to plan their trips so they don’t have to go out of their way to use them.
      Anyway, this post is more of a musing than anything else, so hopefully it’s thought-provoking! It’s also a slightly different style than my usual, given that I initially wrote it for a newsletter with a different audience. But hopefully still of interest.

  2. A related point of interest is that the Stats NZ consumer indexes are based on nominal prices, rather than the after-voucher prices that 70-80% of consumers pay. I hope the PPI etc are a bit more sophisticated, but it is only a hope!

  3. I haven’t used a supermarket discount in years. I only bother with the AA smartfuel card, gives an instant 4cpL discount which equates to a grand total of about $1.80 on a full tank.

    And I can redeem it at my nearest petrol station too, which happens to be amongst the cheapest in Auckland to begin with.

  4. The amount of those discount vouchers is derisory. To think people will change their buying habits for 4 cents a litre? A workmate was enthusing over them to me and when I told her that if she had a completely empty tank (unlikely) her 40 litres would add up to a grand $1.60 on a 4 cent voucher she point blank said she didn’t believe me.
    I think there is a lot of that delusionary thinking goes on around petrol prices and the cost of car ownership in general.

    1. totally agree, people rarely do the simple sums that tell you that people save an amount that is tiny for most people. Some quick economic calculation could tell you it is totally irrational for people to worry about these vouchers unless is a rare on of 20c or more.
      The bigger issues though is for people like myself who either don’t drive and/or make small purchases, this policy is effectively costing me money.
      The bread wars that started this week are much more useful for myself, and for low income families too. Families could save $5 a shop with $1 bread rather than $2 bread, much bigger discount that actually helps budgets of more people, especially low income earners.

    2. I do wonder if some people are getting confused between 4 cents and 4 percent.

      BP’s my local so we use an AA rewards card. No hassle.

      Has anyone worked out the flybuys benefit per litre from shopping at Z? I assume it is like all flybuys and completely worthless.

      1. Excellent point! My father-in-law makes a specific trip to Z to get those points.

        1 airpoints dollar = 5.95 flybuys points (Airpoints dollars being a proxy for NZ dollars)
        20 Litres earns 1 flybuys point
        20 Litres = $42 @ $2.10 per Litre

        Cost $42
        Benefit $0.16

      2. 20l gets you 1 fly buy point. 5.95 fly buy points gets you one Airpoints Dollar (which is nice and close to cash, though probably costs Fly Buys less than $1). Slightly above worthless, but that would be a lot of petrol to get anywhere.

        1. Interesting comparisons, and those are the kind of thoughts I was having that gave me the idea for this post. I was thinking about how I don’t bother to carry around a Fly Buys card, or a Subway card, because the discounts are fairly small… whereas I do usually try to take advantage of a 4-6 cents a litre discount at petrol stations, even though that’s small too.
          OK, so part of the reason is that I use a cardholder rather than a wallet 98% of the time, and I can only fit about four cards in there – license, EFTPOS cards and not much else. Whereas there’s plenty of space in the car for an AA Smartfuel card and vouchers. But still, it’s kind of odd behaviour on my part, which I find academically interesting!
          I should also note that I won’t drive out of my way at all to find cheaper petrol, but will use a discount if I’ve got it to hand. But different people will do things differently.

  5. I seem to remember a sharp increase in prices, which must have been before 2004, which did have an impact of demand and there was a clear shift to public transport. It would be interesting to see if there was any correlation between price spikes and public transport usage.

    Another interesting point is how ineffective the ETS is changing consumer habits. I wonder if there are any big businesses where it would actually be a significant deterrent, even if it was at a higher cost?

    1. Everyone remembers that one because of the large price movement. People switched away from cars, congestion dropped and you could buy a near new luxury car for 7 grand if it was over 3l. It looks like the petrol industry has since figured out that “boiling the frog” (turning up the heat slowly) works better

  6. It is common to give a short run and long run elasticity for fuel as people find it difficult to make changes to travel straight away. These guys say 0.09 short run and and 0.31 long run. (absolute values).

    1. Link missing? Anyway, the main NZ study that I’ve seen is one from 2007, here http://www.nzta.govt.nz/resources/research/reports/331/docs/331.pdf. There’s also an NZIER paper here http://www.nzta.govt.nz/resources/research/reports/520/ which mentions on page 24 that they think those elasticities are overstated. At any rate, I’d say we’re very much due for a follow-up study which takes into account the more recent price rises, and economic ups and downs.
      The other point I’d note about elasticities is that, if NZ is indeed less sensitive to petrol price changes than other countries, then that suggests a lack of alternatives, which can be mitigated in part by improving public transport options. Nowhere is that more pertinent than Auckland, where our spending on petrol per household is the highest in the country, and our PT options are nowhere near what they should be.

    2. Yes clearly elasticity improves with time. It takes a while to shift house or to change a household from two cars to one… But even then in an environment with such a high level of structural auto-dependency it is extremely hard to avoid driving.

      The people are clearly ahead of our current masters on this, as they clearly want more investment in alternatives.

  7. Note also, the oil companies have moved to introduce greater petrol discounts in Auckland, the further out you live, to entice longer-distance travellers (in competition with trains and buses). Instead of one price for all Aucklanders, they have shifted to roughly a 3-tier pricing, with most expensive in the inner suburbs, and cheapest in the outer suburbs.

    See interactive map here: http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11292231

      1. Really?? That’s interesting. I’d have thought McDonald’s would have been priced the same nationally. I guess it’s one of those things you don’t really look at when you order a big mac..

  8. The discount voucher ‘war’ has been a wonderful ploy that convinces us all that the petrol importers and retailers are on our side, getting us the best deal and they are eating their margin to do it; B******t. Just look at the light blue line – the importer margin. Pretty well flat from ’04 through ‘early ’10, then whammo up from around 18cpl to maybe 30cpl and we’re congratulating ourselves on saving 4cpl – delusion! Between them and the tax take we’re being screwed brothers!!! We should still be sitting around 195cpl NOT 225cpl.

      1. Depends. It is probably the petrol station giving the discount so it’s not costing you any more on your food bill.

    1. That was almost exactly the time that Shell went and Z arrived. Remember all the jingoistic cant about evil foreign owners ripping off little old kiwis, and how the local guys would keep them honest? Well that line shows what everyone knew – it was crap. Z has pushed margin well above what was being extracted by overseas shareholders. Remember this lesson next time Peters, Cunliffe, Norman etc start picking on johnny foreigner

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