What correlation is there between gas prices and everything else sold at a convenience market? When a grocery store puts coffee on sale, what does that do for sales of peanut butter?

When it comes to retail sales, such pricing matters have a lot to with one another, according to a research study done by three university professors, including Narayanan Janakiraman, an assistant professor in the Department of Marketing at the University of Arizona’s Eller College of Management.

The study calls it the spillover effect. It occurs when an item a consumer intends to buy is priced either higher or lower than was expected.

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In the case of the gas, when prices spike upward it curtails spending on other items. On the other hand, when the intended purchase of coffee is priced lower than was anticipated, the consumer is likely to spend that savings on a more expensive other item, such as peanut butter.

“Basically, you have a block of essential items and a block of discretionary items,” Janakiraman said. “The impact, up or down, on the essential block is reflected directly onto the discretionary block.”

To study this, Janakiraman, Robert Meyer of the University of Pennsylvania and Andrea Morales of Arizona State University conducted two studies.

In the first study, the professors established an online shopping store. Participants had a list of items they needed to keep in their house. As part of the shopping experience some items were put on sale or had dramatic price increases.

When items had large price increases or decreases, it affected other purchases.

“Someone may like a particular brand of peanut butter, but coffee prices went up so they buy the less expensive brand of peanut butter,” Janakiraman said. “This is something frequently seen.”

That led the professors to two theories. One, a large discount on an item frees up some money that can be spent on something else. The other theory is there might some kind of emotional response.

To test the latter, the professors created an online travel website. Participants were told to book a flight to a certain city and a hotel room there. At random, some participants we’re upgraded to a higher quality hotel. Others were downgraded to a lesser quality hotel.

The group that had been upgraded bought discretionary items through the hotel and rented more expensive cars than the group that was downgraded.

“There seems to be this feeling of gratitude toward the retailer,” Janakiraman said. “Almost like consumers are saying, ‘I am going to pay you back’ or ‘I feel I am going to walk away from the store, or I am going to walk away from this purchase and take my purchasing elsewhere.’ It is an interesting phenomenon.”

Although the studies specifically tested reactions in a retail environment, Janakiraman said the spillover effect can happen in almost any industry.

Joe Pangburn

Inside Tucson Business

Contact Joe Pangburn by e-mail at jpangburn@azbiz.com or call (520) 295-4259. E-mail comments for publication to editor@azbiz.

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