Page 21 - February2019

THE SCIENCE OF PRICING
If you cut or raise the retail price of a fruit or vegetable by 10 percent, will the volume demanded move by the same degree?
BY MATT OGG
It would be nice to have an app that could answer this for It’s now time to chalk the sticks, because we’re about to find out.
any product with the scan of a QR code, but in reality neither
industry professionals nor the economists who study price elas- ticity can give a definitive answer.
Data limitations, the fluid nature of demand and the diversity of consumers between locations and stores have much to do with this, but efforts to calculate and forecast elasticity – essentially consumer responsiveness to price – can give retailers a ballpark estimate to work with.
Knowing whether shoppers are fickle or faithful to a product not only helps department executives select the right pricing strategies to maximize returns, but can go a long way in shaping the decision making of growers and marketers.
For many though, the effect of pricing strategies probably feels much like the following analogy from John Pandol, director of special projects at Pandol Bros in Bakersfield, CA: “It’s not like a chess game; it’s more like the break of a billiards table. What’s going to go which way?”
Before looking at studies about specific fresh produce items, a good place to start for an understanding of elasticity is the economic literature, which mostly looks at the category as a whole and measures elasticity in terms of what percentage an item will increase or decrease in consumption for every decrease or increase in price.
“In general you find something that’s in the order of -0.6 or -0.7,” says Brad Rickard, associate professor in applied economics at Cornell University, Ithaca, NY. “It means if the price were to increase by 10 percent, then consumption of that fruit or vegetable would fall by 6 percent or 7 percent.”
This estimate is for the average fruit or vegetable, and shows the sector is well-positioned. While demand for fresh produce is not as inelastic (consumption doesn’t change as much prices go up or down) as meat or grains, it is still an essential part of the shopping basket and holds steady overall. “The price can change quite a bit but it’s still something they demand. It’s something they need to
PRODUCE BUSINESS / FEBRUARY 2019 / 21
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