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We test the relative income elasticity of shopping at Walmart and Target using quarterly data from 1997-2010. We seek to isolate the effects of income changes by controlling for price level, retail space, and measures of time. Our findings indicate Walmart's income elasticity, while lower than Target's, is positive, indicating shopping at both stores is normal rather than inferior.
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INTRODUCTION
Walmart is often described as performing well during recessions. The common narrative is Walmart offers a low-price shopping experience consumers value more during a recession than when their incomes are higher (Bustillo and Zimmerman, 2008 and Zwaniecki, 2008). This seems to be a textbook example of what economists call an inferior good. A good or service is 'inferior' in the economic sense if consumers buy more when their incomes fall, other things equal. Put another way, a good or service is inferior if its income elasticity of demand is less than zero.
This is different than simply analyzing financial performance during recessions. It would not be enough, for example, to note Walmart's earnings rise when incomes fall, as earnings could rise for many reasons. An ideal test would hold prices and supply factors constant to isolate the effect of income on demand. In this paper we construct such a test to determine the income elasticity of demand for shopping at Walmart and close competitor, Target.
LITERATURE REVIEW
There are a number of studies which examine income elasticity of individual goods. Ito, Peterson, and Grant (1989) attempt to determine the income elasticity of rice in Asian countries. They compare percent changes in real GDP per capita to percent changes in rice consumption from 1971 to 1985 in fourteen Asian countries. They found negative income elasticity for rice in economically advanced Asian countries and positive income elasticity for rice in less advanced countries holding own and substitute prices constant. They suggest that rice becomes an inferior good as the living standards of Asian countries rise.
Garrett and Coughlin (2009) examine income elasticity for lottery tickets using county-level panel data for three states to determine the relationship between income elasticity and tax-burden. They found regressivity of lottery sales varied both over time and relative to income levels in different states.
Studies examining...