RAND REPORT: The Likely Effects of Price Increases on Commissary Patronage

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.

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