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Consumer demand on the markets of socially important goods and services, and public policy

Priority areas of development: economics, sociology
2019
Department: Laboratory of Public Sector Economic Research
The project has been carried out as part of the HSE Program of Fundamental Studies.

This project continues and develops previous research project “Consumer behavior on the markets of socially important goods and services” implemented in 2018 by members of the Laboratory for economic research in public sector. Throughout the year 2019, we kept studying consumer behavior impacting the demand for different types of alcohol, medicine, and sports. In addition, we studied producer behavior on pharmaceutical market. When addressing the consumption of alcohol, we payed attention to regional disparities in alcohol structure, intergenerational differences and price elasticity for different alcoholic beverages. When addressing the problem of access to medicines, we studied factors determining the occurrence of so-called catastrophic expenditures, as well as producers’ motivation to investments in research and development of original drugs and in marketing and promotion of generics. We studied physical activity on the subsample of working adults, identifying incentives and obstacles to everyday physical activity and sports.

The objects of research were: consumers of socially important goods and services; factors affecting consumer choice; expenses on socially important goods and services, public policy in the markets of socially important goods and services.

Goal of research: identification of common patterns in the behavior of consumers (individuals and households) in the markets of socially important goods and services. Following this goal four main objectives were set and worked out:

  • To study the dynamics of consumption of selected types of socially important goods and services, including changes in preferences among different generations of Russians;

  • To identify key problems in the consumer choice of socially important goods and services;

  • To estimate the contribution of selected policy measures on changes in the consumption  of socially important goods and services;

  • Interpretation of the results and development of recommendations for improving public policy regarding consumer behavior in the markets of socially important goods.

Methodology

Analysis of academic literature, devoted to theoretical models and empirical estimates of factors attributable to consumer choice on the markets of socially significant goods. Determinants of consumer behavior were estimated using descriptive data analysis and econometric modeling, including panel data analysis. Contribution of individual factors to intergenerational differences in alcohol consumption were assessed using the Oaxaca-Blinder decomposition.

Empirical base of research

The study used panel data on sales of alcoholic beverages by Russian regions provided by The Federal State Statistical Service (Rosstat); panel microdata ofthe Russia Longitudinal Monitoring Survey (RLMS HSE) for 2010-2017 (http://www.hse.ru/science/rlms) and Levada Center survey on Individuals’ attitudes towards their health and quality of medical care, conducted in 2011 and in 2017.

Results of research

The sharp decline in alcohol consumption in Russia over the past decade was not proportional in all regions. To some extent, the variation in regional performance can be explained by regional alcoholic structure: with a decrease of the share of strong spirits in the structure of alcohol sales, the total volume of consumed alcohol also decreased.

The analysis conducted on microdata confirmed that the demand curves for various alcoholic beverages, including vodka had negative slopes. The opposite result was obtained only for beer - the growth of beer consumption was parallel to it’s price increase. This may be due to a change in consumer preferences, followed by cohort effect.

The analysis revealed pairs of beverages that behaved as substitutes: for men it was dry and fortified wine, for women - fortified wine and vodka, as well as fortified wine and beer. With a rise in the price of one of these drinks, the consumption of the other grew. Beer and vodka turned to be complementary goods for women, while for men - vodka and fortified.

The demand for alcohol depended on the individual characteristics - gender, age, education, marital status. The growth of per capita real incomes had a positive effect on the consumption of almost all types of alcohol for both men and women, which characterized alcohol as a normal good. The greater was the individual consumption of alcohol, the more sensitive a consumer was to a change in the price of alcoholic beverages.

It can be stated that the price increase as a part of the anti-alcohol policy observed during last decade has yielded positive results. In comparison with previous studies performed on earlier data, the analysis for 2010-2017 showed a significant decrease in total ethanol consumption after vodka prices increase, confirming it’s the effectiveness.

In general, the consumption of pure alcohol has recently been declining among younger generations. At the moment, the peak of alcohol consumption is associated with men born in 1955-1974 and women born in 1965-1984. Young people switched from strong spirits to beverages with lower ethanol concentration.

An intergenerational analysis of the volume and structure of alcohol consumption showed differences between consumers that belonged to different age cohorts. However, a significant part of these differences remained unexplained. When moving to younger cohorts, the objective characteristics of individuals, such as gender, age, income level, education level, health status, place of residence, explain a smaller part of their behavior regarding alcohol consumption.

Analysis of households’ spending on medicines showed that catastrophic expenditures on medicines were more common for: families where the head of the household was women, families with children under the age of 6 years, single persons, families with elderly, people with chronic diseases and disabilities.

The age of 60 years is a critical point for increasing the likelihood of catastrophic expenditures on medicines. A high level of income, being a key factor in reducing the likelihood of catastrophic expenses, does not always help to avoid them. The only factor that reduces the likelihood of catastrophic expenditures in the long run is the level of education.

The demand for medicines can be satisfied by producing original drugs or generics. Original drugs can promote new highly effective methods of treatment, however, they are associated with significant R&D expenditures, while the production of generics is usually accompanied by high costs of their promotion. The tradeoff between investing in R&D or in marketing is important from the standpoint of public welfare and justifies government support for pharmaceutical companies investing in R&D.

In recent years, Russia has observed an increase in the share of the physically active working adults. However, in 2017, almost 70% of the working population were physically inactive or practiced sports less than once a week. There is a correlation between the physical activity of working men and women and such indicators as age, BMI, self-assessed health, bad habits, level of education, material security, availability of sports infrastructure at the place of residence / work.

Level of implementation, recommendations on implementation or outcomes of the implementation of the results

The research findings can be applied in the development of public policy towards socially important goods and services. First, the anti-alcohol policy should be differentiated geographically. In particular, in regions with high rates of spirits’ consumption, restricting policies on alcohol sales should be more severe. Second, changes in the taxation of alcohol are needed. Since in Russia the cost of 1 gram of alcohol contained in vodka is cheaper than the cost of 1 gram of alcohol contained in other drinks, the proportions of excise taxes should be changed in order to stimulate the substitution of spirits by wine and beer. Third, our estimates of the price elasticities of alcoholic beverages at the micro level confirm that increasing the price of vodka should be an important step in developing anti-alcohol policy: it will reduce the consumption of both vodka itself and ethanol in general. The analysis conducted for consumer groups with different levels of alcohol consumption justified the need for further price increases, since the most significant positive effect was observed on the groups of people who consume high volumes of alcohol. It will therefore reduce the negative external effects of alcohol consumption (accidents, crimes, early mortality, etc.). To reduce alcohol consumption among young generations, it is important to extend anti-alcohol measures on beer and other drinks with low ethanol concentration.

Forth, the analysis of household spending on pharmaceuticals confirms the need to expand drug reimbursement program on broader groups of population, as well as develop mechanisms to help households cope with catastrophic expenditures on medicines, especially if the household experiences catastrophic expenditures for a long time.

Finally, we propose certain measures to stimulate active lifestyle of working Russians: the introduction of tax deductions from earned incomes in case of spending for physical activity and sports; tax incentives to employers supporting physical activity and sports at work; development of public sports infrastructure; promotion of physical activity and sports at federal and regional levels.