Discover more from Economic Forces
Don't Waste My Time
The importance of time in thinking about economic choices
When my brother was a teenager, he worked at an office supply store. My brother is younger than me. When he worked at this store, he was a high school student and I was a college student. Knowing that his college student brother might need to purchase things like a new printer, ink cartridges, or even a new computer, he would regularly let me know when his store had such things on sale. However, I quickly learned that the store rarely had “sales” in the form of discounted prices. Instead, one could only obtain a discount through things like mail-in rebates.
Other places, like grocery stores and other retailers, do something similar. Sometimes, rather than having discounted prices, stores will provide coupons to their customers. These coupons used to be predominantly delivered through the mail or with newspapers. This required sorting the coupons and cutting them out. Today, a number of retailers provide coupons through their app, which allows customers to scroll through the available coupons and select those that they want to use.
This poses an important question. Why do stores offer coupons and mail-in rebates rather than simply discounting their prices? After all, the coupons and rebates are not restricted to a few select people. Anyone can use a coupon or mail the necessary documentation for their rebate. Why engage in the costly process of distributing coupons and handling mail-in rebates when the price could just be discounted?
The answer, I think, has to do with the value of time. Often, people tend to think about costs in purely monetary terms. However, it is important not to neglect the cost of one’s time. If I travel to multiple stores in order to find the place that sells the good that I want at the lowest price, I can certainly create savings in terms of monetary costs. Nonetheless, searching for the lowest price is costly since I cannot spend that time doing something else.
For those whose time is more valuable, they might be willing to pay a higher monetary price to avoid the cost of searching. Others, who have a lower marginal cost of their time, might be more willing to spend time looking for a better deal if it means saving money. In fact, it is possible that these two types of people could have the same willingness to pay, but with one paying a greater fraction of the cost in terms of money and the other paying a greater fraction of the cost in terms of time.
From the perspective of the firm, this creates somewhat of an issue. Suppose that the firm charges one price to all customers. If they charge low monetary prices, they might attract more customers since both types of consumers would be willing to pay the lower monetary prices. By doing so, the firm forgoes the higher prices that they could charge to those with a high value of time. Nonetheless, if the firm increases its price, that could potentially increase the revenue generated from those with a high value of their time, but this would come at the expense of potentially losing the customers who shop around.
Ideally, the firm would like to price discriminate. The reason is that those who have a high value of their time are likely to have demand that is inelastic with respect to price. At the same time, those who have a lower cost of their time are likely to have demand that is elastic with respect to price. Compared to a uniform price for all consumers, increasing the monetary price for those with a high value of time increases the revenue of the firm. Similarly, decreasing the price for those with a lower cost of time will also increase the revenue of the firm. This seems like a win-win for the firm.
Unfortunately, the firm is likely to have a hard time identifying which customers prefer to search and which customers are willing to pay a higher monetary cost. This makes price discrimination difficult. The firm needs some way of identifying these two types of consumers. One potential way of doing so is through the use of coupons and mail-in rebates. The reason is that coupons require setting aside the time to find the coupons that are available and to select them (or cut them out of the paper). Mail-in rebates requiring filling out paperwork, making copies of receipts, mailing this information, and waiting for the rebate to arrive. These activities are costly. However, they are likely less costly than directly searching for lower prices. This gives an incentive for those who have a low marginal cost of time to spend less time searching and more time clipping coupons. On the other hand, those who are willing to pay higher monetary prices to avoid time spent searching aren’t likely to cut coupons or send for their rebate.
The coupons and mail-in rebates allow the firm not only to identify the two different types of consumers, but also to charge them different prices. As I previously explained, this generates more revenue for the firm. So long as the marginal cost of implementing the coupon or rebate schemes is less than the increased revenue, the firm can increase its profit.
While this is just one example, the importance of the role of time in economic decision-making also shows up in other ways. In fact, the neglect of the costs of one’s time is even something that economists occasionally struggle with. For example, the permanent income hypothesis implies that people tend to make their consumption decisions based on the permanent component of their income and that transitory fluctuations in income are associated with corresponding saving or borrowing. Some economists thought that they had found evidence to refute the permanent income hypothesis when they discovered that the consumption expenditures of retirees declined pretty significantly after retirement. This was especially true for things like food expenditures. Since retirement is an expected event, the permanent income hypothesis would suggest that the act of retirement should not have any impact on consumption. The fact that consumption expenditures declined pretty significantly seemed to suggest a clear refutation of this idea.
As Mark Aguiar and Erik Hurst demonstrated, these critics of the permanent income hypothesis got things wrong. While retirees expenditures on food declined significantly, there was no corresponding decline in caloric intake. In other words, their expenditures declined, but their consumption did not. Why? Because the cost of their time had declined. As a result, retirees spent more time shopping for sales, clipping coupons, and preparing their own meals at home than they had done while working. This focus on time not only demonstrated that the critique of the permanent income hypothesis was misguided, but actually provided evidence in favor of the hypothesis.
Hopefully, this post illustrates the value to you, the reader, of the importance of time in economic analysis. Although, paradoxically, if it did you might have already quit reading.