This is a linkpost for https://rethinkpriorities.org/publications/inconsistent-evidence-for-price-substitution
Executive summary
- One prominent strategy for reducing animal product usage is to decrease the prices of plant-based analogs for meat, dairy and eggs. Cross-price elasticities measure how prices of analogs affect sales of animal products, and vice versa.
- Previously, we found cross-price elasticities that sometimes indicated decreased plant-based milk prices could cause increased consumption of dairy milk. To see whether this result replicated, we studied elasticities of butter and margarine.
- We synthesize 51 cross-price elasticities from 18 demand studies of butter and margarine.
- We expected butter and margarine to be substitutes. Instead, we observed wide variation in estimates, complementarity, and even opposite signs of two elasticities for the same pair of products in the same setting (study, time, country, etc.).
- Margarine was a substitute for butter in two thirds of estimates, while butter was a substitute for margarine in about half of estimates.
- The results are likely explained by some combination of methodological issues and complex consumer behavior.
- Estimating elasticities from observational data is very difficult, and there is some evidence of methodological issues in the literature. Consumer behavior may be highly context specific.
- Our best highly uncertain guess is that complex consumer behavior contributes slightly more of the observed variation in results, with methodological issues accounting for the remaining slight minority of variation.
- Price substitution between plant-based analogs and animal products is not a certainty.
- It is possible that decreasing plant-based analog prices causes harmful increases in animal product usage in some contexts.
- Research aiming to test behavioral theories that might explain our results and to validate observational estimates of elasticities against experimental methods may help clarify consumer behavior.
Skimming the studies in the meta-analysis, I am rather sceptical that anything can be concluded from these studies. As far as I can tell, each study investigates how quantity sold varies with the price, but cannot distinguish between demand and supply shocks. If any price changes are instead due to demand shocks, then the estimated coefficient could be severely biased and potentially possess an incorrect sign. Therefore, without a valid instrumental variable that only affects prices through supply-side factors, these coefficients will not be informative of consumers' true substitution patterns.
Thanks for weighing in!
I read your comment to mean that you skimmed the butter and margarine studies that we considered in our brief analysis, but please correct me if I misunderstood.
Yes, I agree that there is very little consideration for price endogeneity in the butter and margarine studies that we found. I could have made that more clear in our report. I suppose that oversight is due to the studies generally skewing older and using older methods. One of the meta-analyses we reviewed (Auer and Papies, 2020) included price endogeneity in their analysis, and they find a positive association between overlooking endogeneity and elasticity size. I do think there are other methodological issues that might be biasing these results--so accounting for price endogeneity may not remove all variation due to methodological issues--but I agree that including strong supply-side instrumental variables would be a nice standard practice.
Thank you for the reply. Indeed, I was referring to the studies engaging with butter-margarine substitution. However, I think it definitely needs emphasising just how weak those studies are and thus that they cannot be trusted to make any policy decisions. Additionally, while relevant, I would not want to use Auer and Papies (2020) as a basis for policy decisions either, as it is quite unclear how comparable those estimates are due to them pooling across a wide range of markets potentially quite different to this one (is the degree of product differentiation the same? groceries could be different to pharmaceuticals or durables). Finally, there is also the issue the papers they synthesise using instruments might not use good ones, but I do not have the time to check that.