UK SHOPPERS ARE MORE PRICE CONSCIOUS THAN ITALIANS

Italians appear to be far less fussy shoppers than their UK counterparts when it comes to price. Shoppers in the UK are much more likely to find an alternative to a product whose price has risen, whereas Italians appear to be far less concerned with price changes. The exception is alcohol, where UK consumers have deep-rooted habits.

These are some of the many findings of research by Caterina Marini. Her study, presented at the Royal Economic Society’s 2010 annual conference, compares consumer behaviour between the two countries for each year since 1970.

The research shows that taxes on tobacco have a much greater affect on consumption in the UK than in Italy. But while some cultural differences like this persist, a key driver of the national differences in consumer behaviour is government spending and taxation. This illustrates the profound effect of government policies in shaping the consumer behaviour – and hence the lifestyles – of the population.

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Two European countries and two specific patterns in consumer spending: cross-country comparison of consumption between Italy and the UK highlights how household behaviour inevitably reflects the effects of specific political and financial policy, and consumption habits.

Almost all the aspects of economic policy require some knowledge of household or individual consumption behaviour and consumption estimates are a guide for important issues, such as taxation, the real interest rate and cost of living indices. The knowledge of either price responses or income changes is extremely important to determine the impact on demand for commodities of alternative or new policies regarding consumer decisions.

This work is an empirical study of consumption behaviour disaggregated into its components for Italy and the UK. It is an attempt to provide a full comprehensive cross-country comparison of consumption behaviour through two broad levels of analysis using data time series of Household Final Consumption Expenditure over a period of 36 years from 1970 and involving all the 12 divisions of goods and services of the classification of household spending.

The objective is to proceed towards a real picture of the consumption phenomenon by joining a descriptive study and an empirical analysis.

The report from the descriptive analysis outlines how government spending, tax policies and public sector privatisation determined a noticeable diversity in consumer expenditure on some goods and services in the two countries over the whole period under investigation.

Spending on tobacco products, for example, experienced a significant decrease in the UK because of a higher tax that the British government levies on cigarettes than the Italian government does. The opposite is the case of the expenditure share on education that in the UK more than doubled in value between 1970 and 2007 because of a process of ‘privatisation’ of the education system that occurred in the UK in 1988, while is quite steady over the whole period in Italy because of a still public structure of the service.

The above is obviously an over-simplistic description of two extreme examples of a scenario that is in reality much more complex and variegated. In the context of delineating cross-country differences and similarities in household consumption, a central role is also played by consumption habits that characterise consumers in the two countries.

The complete absence of any variation in the bulk of British relative prices against the large fluctuations of those in Italy suggests that reasonably deep-rooted consumption habits characterise consumer behaviour in Italy much more than in the UK.

Hence, if the price of some good or service increases, the Italian household persists in purchasing the same good or service without considering the change in its price, while the British household is inclined to purchase a substitute. In the UK, this evidence is valid for almost all commodities, except for alcoholic beverages, which represent the typical example of deep-rooted habitual consumption.

The findings, worked out through the implementation of a system of demand equations (that is the Indirect Translog System of Christensen, Jorgenson and Lau – 1975) demonstrate that both Italian and British households decide to purchase all commodities irrespective of changes of their own price. Therefore, consumer demand for all commodities is insensitive to price changes.

The opposite is the case, if responsiveness to income changes is analysed. In Italy, many more goods and services are denoted as being luxuries than in the UK because their demand rises more than proportionately to a change in income. In the UK, the commodities are equally located between necessities and luxuries.

ENDS

Caterina Marini, Department of Statistics, University of Bari

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