Are Butter and Margarine Close Substitutes? New Evidence From New Zealand

Abstract

In many economics textbooks, butter and margarine are given as an example of close substitute goods. Indeed, margarine was developed originally as a substitute for butter, and for long time margarine was perceived as being such a close substitute for butter that dairy industries in various countries pushed for the enactment of laws to restrict or prohibit the sale of margarine. However, as margarine has developed into a product in its own right, and has been promoted as a low fat and healthy food, and customers have gradually become more health conscious over time, are they still close substitutes? We test this question using a range of quantitative techniques, such as price correlation, co-integration, and demand analysis, applied to weekly supermarket scanner data on the sales volumes and prices of butter, margarine, and butter blend, for the period 2003 to 2005, in New Zealand. The results suggest that butter and margarine may not be close substitutes after all, and that textbook authors may need to find new examples of close substitutes for their economics textbooks.