Abstract
In theory, the nearest-nickel rounding scheme renders no financial gains for anyone given that each final digit has the same probability of appearing. However, in practice, rounding may yield non-zero net effects as most store prices end with nine. In this paper, price data from representative Canadian grocery stores are used to assess whether the current rounding system imposes a monetary loss on firms or consumers. Specifically, I evaluate how one- to ten-item purchases and the six different Canadian provincial sales tax rates influence penny-rounding. The results show that penny-rounding financially benefits the firms at the expense of the consumers, imposing a net transfer of approximately $3.27 million CAD from consumers to grocery vendors every year. This amount averages to $157 of additional revenue for a typical grocery store per year.
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Notes
In this paper, grocery store serves as an umbrella term for general grocery stores, supermarkets, and convenience stores. This is because the types of items used in this study can generally be found at any of the venues above. However, I exclude warehouse clubs, wholesale distributors, and discount stores from this generalization.
In this paper, a fair rounding scheme describes a scenario in which all final digits are equally likely, such that the expected net rounding is zero.
The population of Canada is used as a proxy for the number of consumers in the country. Data are obtained from 2011 Census Population by Year by Statistics Canada (2013b).
The number of grocery stores in Canada, including supermarkets and convenience stores (Retail Council of Canada 2013).
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Acknowledgements
I would like to express my deep gratitude to Professor Michael Vaney and Professor Jonathan Graves for their patient guidance, enthusiastic encouragement and critiques of this research.
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Christina Cheung was the first place winner of the Best Undergraduate Paper Award Competition at the 84th International Atlantic Economic Conference in Montreal, Canada, October 5-8, 2017.
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Cheung, C. Eliminating the Penny in Canada: An Economic Analysis of Penny-Rounding on Grocery Items. Atl Econ J 46, 231–239 (2018). https://doi.org/10.1007/s11293-018-9584-8
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DOI: https://doi.org/10.1007/s11293-018-9584-8