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FUNGIBILITY AND CONSUMER CHOICE: EVIDENCE FROM COMMODITY PRICE SHOCKS.

Justine S Hastings1, Jesse M Shapiro2

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Consumers do not treat money as fungible, even for specific purposes like "gas money." Studies show people adjust purchasing habits, like buying lower-octane fuel, when prices change, indicating psychological accounting rather than pure fungibility.

Keywords:
consumer psychologyfungibilitygasolineincome effects

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Area of Science:

  • Behavioral Economics
  • Consumer Behavior
  • Microeconomics

Background:

  • The fungibility of money is a core assumption in standard economic theory.
  • However, psychological research suggests that individuals may not treat money as perfectly interchangeable across different contexts or purposes.

Purpose of the Study:

  • To empirically test the fungibility of money using a novel approach based on commodity price shifts.
  • To investigate consumer responses to price changes in gasoline quality grades.

Main Methods:

  • Formulated a test for money fungibility based on parallel price shifts of different commodity quality grades.
  • Embedded the test within a discrete-choice model of product quality selection.
  • Estimated the model using panel microdata from gasoline purchases.

Main Results:

  • Consumers substitute to lower-octane gasoline when prices rise, beyond what income effects would predict.
  • Consistently rejected the null hypothesis that households treat "gas money" as fungible with other income.
  • Found that category budgeting models best explain the observed decision-making, with loss aversion and salience also playing roles.

Conclusions:

  • Household "gas money" is not treated as fungible with other income.
  • Psychological factors, such as category budgeting, significantly influence consumer choices regarding product quality and spending.
  • Findings challenge the assumption of perfect money fungibility in economic models.