Two theories predict different household responses during economic recessions. The
Lipstick Effect predicts that consumers may preserve demand for small affordable
luxuries that provide psychological comfort, while Engel’s law predicts that necessities
become more important when resources are constrained. Using annual
scanner data from the NielsenIQ Homescan Data, we estimate an Exact Affine Stone
Index (EASI) demand system to examine how households reallocate spending across
normal periods and two recession episodes: the Great Recession (2008–2009) and
the COVID-19 recession (2020). The estimated own price elasticities are negative
and inelastic for all seven products. Cross price elasticities show that staple foods
tend to move together, especially eggs and milk, consistent with joint consumption
within the household food basket. Expenditure elasticities are greater than unity for
staple foods and below unity for cosmetics and other nonfood products, suggesting
that additional within basket expenditure is allocated more strongly toward staples.
In the recession analysis, lipstick shows a statistically significant Engel curve shift.
During recession years, demand becomes less price elastic for lipstick, nail polish,
air freshener, and eggs, while milk, face care, and bread become slightly more price
responsive. Expenditure elasticities increase for lipstick, air freshener, and face care,
whereas staple food expenditure elasticities change little across periods.
