The loss of the penny may not seem significant, but according to one undergraduate student, it can add up big time.
University of British Columbia student Christina Cheung has found that while the process for rounding seems fair, it actually doesn’t work out to benefit consumers.
With the penny no longer in circulation, all cash transactions are rounded up or down in stores. Totals ending in $0.01 or $0.02 are rounded down to $0.00, and totals ending in $0.06 or $0.07 are rounded down to $0.05. Conversely, totals ending in $0.03 or $0.04 are rounded up to $0.05, and totals ending in $0.08 or $0.09 are rounded up to $0.10.
This procedure seems equitable until the frequency that transactions are rounded up or down is taken into account. Cheung and a friend catalogued more than 18,000 grocery store items and their prices. They found 60 per cent of the time, grocery store items ended in nine. Convenience store items end in nine 82.5 per cent of the time.
Cheung, who is a double major in economics and combined mathematics and statistics, says that when you add tax onto transactions, stores are more commonly rounding up than down.
Items ending in $0.09 will almost always result in a final total after tax that rounds up in B.C., where a five per cent sales tax is applied.
Rounding up by a cent or two isn’t costly in a single transaction, but it adds up over time. Based on rounding, grocery stores across Canada see a cumulative $3.27 million extra in their cash registers by the end of the year. That works out to about $157 per store, on average.
And grocery stores can adjust prices to exploit the discrepancy, too.
In one hypothetical example presented by Cheung, a $6.73 bottle of shampoo totals to $7.07 after tax, which would round down to $7.05. But if the store were to raise the cost of shampoo by one cent to $6.74, the final price is $7.08, which rounds up to $7.10. By adding a single cent to the price, the store gains $0.05 in total.
The price adjustment only works when a customer is buying a single item for cash.
“Stores now have an incentive to price things in a way that maximizes the effects of rounding,” said Cheung, The Vancouver Sun reports. “With the data hey have, firms could easily figure out which items are sold individual and adjust those prices.”
Cheung’s report goes on to note that low-income earners are the most likely to be exploited by this system, as they are more likely to pay for items in cash. A recent study by Payments Canada found that while cash only accounts for 13 per cent of the money paid at Point of Service (POS) terminals, it is still the most widely used form of payment based on volume of transactions.
Cheung’s report took first place in the Best Undergraduate Paper competition, presented by the International Atlantic Economic Society.