Working Paper: NBER ID: w11307
Authors: Igal Hendel; Aviv Nevo
Abstract: Temporary price reductions (sales) are common for many goods and naturally result in large increases in the quantity sold. Demand estimation based on temporary price reductions may mis-measure the long run responsiveness to prices. In this paper we quantify the extent of the problem and assess its economic implications. We structurally estimate a dynamic model of consumer choice using two years of scanner data on the purchasing behavior of a panel of households. The results suggest that static demand estimates, which neglect dynamics: (i) overestimate own price elasticities by 30 percent; (ii) underestimate cross-price elasticities to other products by up to a factor of 5; and (iii) overestimate the substitution to the no purchase, or outside option, by over 200 percent.
Keywords: Demand Estimation; Consumer Behavior; Inventory Management; Price Elasticities
JEL Codes: G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price changes (P22) | consumer purchasing behavior (D19) |
| static demand estimates (C51) | overestimate own price elasticities (D12) |
| static models (C69) | underestimate cross-price elasticities (C51) |
| static model (C69) | overestimate substitution to no purchase option (C60) |
| inventory management (M11) | dynamics of consumer behavior (D12) |
| intertemporal substitution effects (D15) | mismeasurement of long-run elasticities (C51) |