Giffen Goods in Real Life

It\’s a basic pattern in economics, drummed into the head of every intro student, that when the price of a good rises, people tend to consume less of it; conversely, when the price of a good falls, people tend to consume more of it. Sure, there are some goods that are more responsive to changes in price than others. Sure, there may even be short-term exceptions like when a high price entices a few buyers looking for a high-status good. But even then, if the price keeps rising, the quantity demanded drops off.

But there\’s one exception to this rule, called a Giffen good, where a higher price causes demand for the good to rise. Until very recently, I had always told students when explaining this case that the example was a theoretical curiosity, without real-world application. I may have to change that.

The Giffen good was named by Alfred Mashall in his Principles of Economics, with the first edition published in 1890. Marshall explains the conventional wisdom that when the price of a good rises, quantity demanded falls, and vice versa. But he adds (Book III, Chapter VI): \”There are however some exceptions. For instance, as Sir R. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it. But such cases are rare; when they are met with, each must be treated on its own merits.\”

To spell out the underlying logic in modern terms, every price change has two effects on people: 1) it causes them to want to substitute away from what is now relatively more expensive and toward what is now relatively cheaper; and 2) it alters the buying power of their income. Most of the time, these two effects reinforce one another: that is, a higher price for a good makes people want to consume less of that good both because it\’s now relatively more expensive, and also because the higher price has reduced the buying power of their income.

But now consider what economists call an \”inferior good,\” which is a good that people tend to buy more of as their income falls. Standard examples of an inferior good might be something like hamburger or oatmeal. Imagine further a very poor society, in which people spend a lot of their income on one source of food: in Marshall\’s example, that one source of food is bread; in the example often used long-ago when I was in college, it was potatoes in Ireland in the 19th century. Imagine that the price of that staple food rises. Usually, a higher price means less of that good consumed. But Giffen good is an inferior good, and the reduction in the buying power of people\’s incomes as the price rises (together with the lack of cheaper food alternatives, because for poor people this is already the cheapest alternative) means that they shift toward buying more of the good, rather than less.

Alfred Marshall attributed this idea to Robert Giffen, who was a financial writer who moved from journalism (including a stint in the early years of the Economist magazine) to being a government adviser on statistical questions. The attribution may be overly generous. As far as I know, the concept has not been found in any of Giffen\’s books or writings. But the terminology stuck, along with the idea that this was a very rare occurence. In Chapter 8 of my Principles of Economics textbook (and I encourage teachers and students of economics to check it out here), I wrote: \”However, no study has ever found conclusive evidence of a Giffen good in the real world. A famous economist named Francis Ysidro Edgeworth summed up the situation regarding Giffen goods in this way in 1914: `Only a very clever man would discover that exceptional case; only a very foolish man would take it as the basis of a rule for general practice.`\” [My notes to myself say that the Edgeworth quotation is from p. 9 of a book called ”On the Relations of Political Economy to War.\”]
Well, it seems that the development economics literature has now produced strong evidence of a real-world example of a Giffen good. The December 2011 issue of the Region magazine from the Federal Reserve Bank of Minneapolis has a lively interview with Esther Duflo about her work. The whole interview is worth reading, but one point that jumped out at me was her commentary about the evidence for a Giffen good. Here\’s Duflo, taking the possibility of real-world Giffen goods quite seriously:

\”A recent example of this is an experiment by Rob Jensen and Nolan Miller, where they look at the effect on consumption of changes in the price of rice. If you decrease the price of rice, will people consume more rice or less rice? In the real world, it’s very difficult to know that because whenever the price of rice decreases, that’s the result of a combination of supply and demand factors, and isolating variation in the price of rice as purely exogenous is essentially impossible.So you need an experiment to know, and in fact they found something very interesting when they did this experiment in one place in China where rice is a very important part of the food basket for the poor. And they found that when the price decreased, people ate less rice, not more rice, which means rice is a Giffen good …

\”I think you can’t dispute the fact that rice, in this particular place in China, is a Giffen good…. Yes, it doesn’t mean that rice is a Giffen good here in the United States. I’m not interested in that question. But the fact that there is one Giffen good somewhere I think makes this interesting. It is incremental knowledge for how we think about the world and is very, very, very important for what we think about the poor and food. And in particular, in the policy domain, it shows that policies that subsidize the price of staples—which is quite common—might be counterproductive from the view of getting people to eat more. It still might be good for the poor, because they consume a lot of staples, and subsidizing a staple improves their income. But if the objective was to make people eat more, that’s not necessarily the way.

\”That does not mean that it would be true in India, but the very fact that there is this possibility means that we want to investigate this question more. And we can try a similar experiment elsewhere to see in what conditions this will reproduce. With a Giffen good, the advantage is that we have a very established theory that helps us think what’s likely to be a Giffen good. It has to be something that is a very big part of the budget so that the income effect is large. And it must be an inferior good. That gives us a sense of, in another place, how would we go about looking for a good that’s likely to have the same characteristics? Maybe there are no Giffen goods here because no goods have those characteristics. But maybe if we went to Ethiopia, it would be whatever is the staple food there. We can see what’s the share of this staple in people’s budgets and get some idea of what we are looking for.\”

The research paper to which Duflo is referring is Robert Jensen and Nolan Miller. 2008. “Giffen Behavior and Subsistence Consumption.” American Economic Review 98 (4): 1553-77.

Turkey Demand and Supply, and the Thanksgiving Dinner Price Index

(Originally appeared on Monday, 11/21. Bumped to today for your Thanksgiving entertainment.)

As Thanksgiving preparations arrive, I naturally find my thoughts veering to the evolution of demand for turkey, technological change turkey production, market concentration in the turkey industry, and price indexes for a classic Thanksgiving dinner. Not that there\’s anything wrong with that.

The last time the U.S. Department of Agriculture did a detailed \”Overview of the U.S. Turkey Industry\” appears to be back in 2007. Some themes about the turkey market waddle out from that report on both the demand and supply sides.

On the demand side, the quantity of turkey consumed rose dramatically from the mid-1970s to the mid-1990s, but since then has declined somewhat. The figure below is from the USDA study, but more recent data from the website run by the National Turkey Federation report that U.S. producers raised 244 million turkeys in 2010, so the decline has continued in the last few years. Apparently, he Classic Thanksgiving Dinner is becoming slightly less widespread.

On the production side, the National Turkey Federation explains: \”Turkey companies are vertically integrated, meaning they control or contract for all phases of production and processing – from breeding through delivery to retail.\” However, production of turkeys has shifted substantially, away from a model in which turkeys were hatched and raised all in one place, and toward a model in which all the steps of turkey production have become separated and specialized–with some of these steps happening at much larger scale. The result has been an efficiency gain in the production of turkeys.  Here is some commentary from the 2007 USDA report, with references to charts omitted for readability:

\”In 1975, there were 180 turkey hatcheries in the United States compared with 55 operations in 2007, or 31 percent of the 1975 hatcheries. Incubator capacity in 1975 was 41.9 million eggs, compared with 38.7 million eggs in 2007. Hatchery intensity increased from an average 33 thousand egg capacity per hatchery in 1975 to 704 thousand egg  capacity per hatchery in 2007.

Turkeys were historically hatched and raised on the same operation and either slaughtered on or close to where they were raised. Historically, operations owned the parent stock of the turkeys they raised supplying their own eggs. The increase in technology and mastery of turkey breeding has led to highly specialized operations. Each production process of the turkey industry is now mainly represented by various specialized operations.

Eggs are produced at laying facilities, some of which have had the same genetic turkey breed for more than a century. Eggs are immediately shipped to hatcheries and set in incubators. Once the poults are hatched, they are then typically shipped to a brooder barn. As poults mature, they are moved to growout facilities until they reach slaughter weight. Some operations use the same building for the entire growout process of turkeys. Once the turkeys reach slaughter weight, they are shipped to slaughter facilities and processed for meat products or sold as whole birds.

Turkeys have been carefully bred to become the efficient meat producers they are today. In 1986, a turkey weighed an average of 20.0 pounds. This average has increased to 28.2 pounds per bird in 2006. The increase in bird weight reflects an efficiency gain for growers of about 41 percent.\”

U.S. agriculture is full of these kinds of examples of remarkable increases in yields over a few decades, but they always drop my jaw. I tend to think of a \”turkey\” as a product that doesn\’t have a lot of opportunity for technological development, but clearly I\’m wrong. Here\’s a graph showing the rise in size of turkeys over time.

The production of turkey remains an industry that is not very concentrated, with three relatively large producers and then more than a dozen mid-sized producers. Here\’s a list of top turkey producers in 2010 from the National Turkey Federation

For some reason, this entire post is reminding me of the old line that if you want to have free-flowing and cordial conversation at dinner party, never seat two economists beside each other. Did I mention that I make an excellent chestnut stuffing? 

Anyway, the starting point for measuring inflation is to define a relevant \”basket\” or group of goods, and then to track how the price of this basket of goods changes over time. When the Bureau of Labor Statistics measures the Consumer Price Index, the basket of goods is defined as what a typical U.S. household buys. But one can also define a more specific basket of goods if desired, and for 26 years, the American Farm Bureau Federation has been using more than 100 shoppers in states across the country to estimate the cost of purchasing a Thanksgiving dinner. The basket of goods for their Classic Thanksgiving Dinner Price Index looks like this:

The top line of this graph shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. One could use the underlying data here to calculate an inflation rate: that is, the increase in nominal prices for the same basket of goods was 13% from 2010 to 2011. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The line is relatively flat, which means that inflation in the Classic Thanksgiving Dinner has actually been a pretty good measure of the overall inflation rate in the last 26 years. But in 2011, the rise in the price of the Classic Thanksgiving Dinner, like the rise in food prices generally, has outstripped the overall rise in inflation.

Thanksgiving is my favorite holiday. Good food, good company, no presents–and all these good topics for conversation. What\’s not to like?