Price Theory Paradox When Gas Prices Fall

(p. A3) When gas prices fall, Americans reliably do two things that don’t make much sense.
They spend more of the windfall on gasoline than they would if the money came from somewhere else.
And they don’t just buy more gasoline. They switch from regular gas to high-octane.
A new report by the JPMorgan Chase Institute, looking at the impact of lower gas prices on consumer spending, finds the same pattern as earlier studies. The average American would have saved about $41 a month last winter by buying the same gallons and grades. Instead, Americans took home roughly $22 a month. People, in other words, used almost half of the windfall to buy more and fancier gas.
. . .
Professors Hastings and Shapiro showed that households adjusted their gas consumption much more sharply in response to changes in gas prices than in response to equivalent changes in overall income. In the fall of 2008, for example, as gas prices fell amid a broad economic collapse, consumers responded as if the decline of gas prices were the more important event, significantly increasing purchases of premium gas.
Moreover, this behavior was prevalent: 61 percent of the households made at least one irrational gas purchase. People “treat changes in gasoline prices as equivalent to very large changes in income when deciding which grade of gasoline to purchase,” they wrote.

For the full commentary, see:
Binyamin Appelbaum. “When Gas Becomes Cheaper, Americans Buy Fancier Gas.” The New York Times (Thurs., OCT. 20, 2015): A3.
(Note: ellipsis added.)
(Note: the online version of the commentary was updated on OCT. 19, 2015, and has the title “When Gas Becomes Cheaper, Americans Buy More Expensive Gas.”)

The Hastings and Shapiro article mentioned above, is:
Hastings, Justine S., and Jesse M. Shapiro. “Fungibility and Consumer Choice: Evidence from Commodity Price Shocks.” Quarterly Journal of Economics 128, no. 4 (Nov. 2013): 1449-98.

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