Cover: The Likely Effects of Price Increases on Commissary Patronage

The Likely Effects of Price Increases on Commissary Patronage

A Review of the Literature

Published Mar 27, 2015

by Craig A. Bond, Julia Pollak, Bernard D. Rostker, Cate Yoon

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Research Questions

  1. How have price increases affected grocery retailers in the private sector?
  2. How might the predicted commissary price increase translate into changes in sales and revenues for the Defense Commissary Agency?
  3. What secondary and nonmarket effects might occur as a result of a change in commissary pricing?
  4. What strategies might be used to estimate potential changes more precisely?

To determine the likely effects of increased commissary prices, should the annual taxpayer subsidy to the Defense Commissary Agency (DeCA) be reduced, this report reviews how price changes have affected grocery retailers in the private sector through changes in store choice and analyzes how these results might translate into changes in sales and revenues within the commissary system. Prior research from the private sector suggests that commissary consumers are likely to be relatively responsive to price changes, so price increases should be expected to result in both decreased commissary unit sales and decreased revenues. Raising overall price levels will likely not be a successful strategy to cover shortfalls in costs caused by the elimination of the annual U.S. Department of Defense appropriation. Commissary patrons will see their grocery bills increase, though not by the full amount of the price increase if they substitute non-grocery goods and services and/or alternative retailers of groceries. In addition, changes in commissary pricing may have negative secondary and nonmarket effects, including effects on retention and recruitment; reductions in contributions to Morale, Well-Being, and Recreation programs; possible demand reductions for military exchanges; and changes in the calculated cost of living adjustment. The report also provides a strategy for gathering the information needed to estimate the relevant effects of a price increase on the activities of DeCA with greater precision.

Key Findings

The Economic Literature Suggests That Store Choice Depends on Both the Fixed and Variable Costs of Shopping

  • Non-price, or "fixed," costs depend on store-dependent characteristics like location, quality, and product assortment. They do not change with the bundle of goods purchased at each trip.
  • Variable costs are the costs of the goods purchased and are directly affected by aggregate price levels of a store.

Estimates of the Responsiveness of Demand to Non-Price and Variable Costs Vary Substantially Across Studies

  • Most studies suggest that when there are available substitute stores, the increase in revenue due to an increase in price levels will be offset more than proportionally by the negative effect of a decrease in quantity purchased on revenues. If these findings hold true for a change in the price of goods sold at commissaries, then an increase in prices will decrease revenues. As such, raising overall price levels will not be a successful strategy to cover shortfalls in costs caused by the elimination of the annual Department of Defense appropriation.
  • Raising prices will likely negatively affect servicemembers and retirees who currently patronize the commissary system through increased grocery bills, though the absolute magnitude of the change in overall expenditures will likely not be equal to the percentage price increase.
  • There are several potential secondary and nonmarket effects of increasing commissary price levels that might further influence a benefit-cost calculation of a change in commissary pricing structures.

Recommendations

  • Analysis of the effects of commissary price changes should take consumer responsiveness into account.
  • The nonmarket benefits associated with commissaries may be valuable to servicemembers and retirees, although remains largely unmeasured in previous studies.
  • Further research is needed to quantify the demand responsiveness to price changes and changes to the size of nonmarket benefits which ultimately impacts store choice.

This research was conducted within the Forces and Resources Policy Center of the RAND National Defense Research Institute, a federally funded research and development center sponsored by the Office of the Secretary of Defense, the Joint Staff, the Unified Combatant Commands, the Navy, the Marine Corps, the defense agencies, and the defense Intelligence Community.

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