Where Did All That Money Go? Understanding How Consumers Allocate Their Consumption Budget
Published 11/1/2008
Author: Rex Y. Du & Wagner A. Kamakura
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Executive Summary
All types of consumer expenditures ultimately vie for the same pool of limited resources—the consumer’s discretionary income. Consequently, primary demand in a particular industry can be better understood in relation to consumer expenditures in others. Although marketers may believe that they are operating in distinct and unrelated industries, it is important to understand how consumers allocate a given budget to meet different consumption needs and make trade-offs across a wide range of expenditure categories (e.g., food, apparel, recreation, transportation, medical and personal care). How does consumers’ spending on food away from home influence their spending on food at home? How much would escalating gas prices affect consumer spending on apparel versus transportation? Which industries would gain most in terms of extra consumer spending as result of a tax rebate? Answers to these questions are also important from a public policy standpoint because they provide insights into how consumer welfare would be affected as consumers reallocate their consumption budgets in response to environmental changes.
This study proposes a structural demand model to approximate the household budget allocation decision, in which consumers are assumed to allocate any given budget across a full spectrum of consumption categories to maximize an underlying utility function. Moreover, the proposed model explicitly links household discretionary income, category price indexes, and demographics (through household-specific taste parameters) to household category expenditures. In the prediction of industry sales or the assessment of market potential, this enables analysts to factor in projections about household income, inflation rates, and demographic trends through an integrated framework. The authors illustrate the proposed demand model using Consumer Expenditure Survey data from the United States, covering 31 consumption categories over 22 years. The calibrated model makes it possible to draw direct inferences about the trade-offs that individual households make when facing budget constraints and how their relative preferences for different consumption categories vary across life stages and income levels. The study also demonstrates how the proposed model can be used in policy simulations to quantify the potential impacts on consumption patterns due to shifts in prices or discretionary income.
Biography
Rex Y. Du has been an Assistant Professor of Marketing at the University of Georgia since 2005. He received his PhD from Duke University. Rex’s research has been published in various leading academic journals, including Journal of Marketing, Journal of Marketing Research, Marketing Science, and Quantitative Marketing and Economics. His paper “Size and Share of Customer Wallet” won the Marketing Science Institute Dissertation Proposal Competition and was a finalist for Journal of Marketing’s Paul Root Award for significant contribution to the advancement of the practice of marketing. Rex’s current research interests are in database marketing, customer relationship management, household consumption and consumer finance, category management, and new product sales forecasting. His home page is located at http://rexdu.myweb.uga.edu.
Wagner A. Kamakura is Ford Motor Company Professor of Global Marketing in the Fuqua School of Business at Duke University. Professor Kamakura holds a PhD in Marketing from the University of Texas at Austin, an MS in Industrial Engineering from the University of Sao Paulo (Brazil), and a BS in Mechanical Engineering from the Technological Aeronautics Institute (Brazil). He is a coauthor of Market Segmentation: Conceptual and Methodological Foundations, as well as more than 80 articles in academic journals. He has served as the editor of Journal of Marketing Research, as area editor for Marketing Science, and as associate editor for Journal of Consumer Research. He is currently a member of the editorial boards of Journal of Marketing Research, International Journal of Research in Marketing, Journal of Retailing, and Marketing Science. His current research interests are in efficiency analysis, customer relationship management, market segmentation and market structure, and database marketing.
Journal of Marketing, Volume 72, Number 6, November 2008
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