Working Paper: NBER ID: w14737
Authors: Gautam Gowrisankaran; Marc Rysman
Abstract: Most new consumer durable goods experience rapid prices declines and quality improvements, suggesting the importance of modeling dynamics. This paper specifies a dynamic model of consumer preferences for new durable goods with persistently heterogeneous consumer tastes, rational expectations, and repeat purchases over time. We estimate the model on the digital camcorder industry using panel data on prices, sales and characteristics. We find that the one-year elasticity in response to a transitory industry-wide price shock is about 25% less than the one-month elasticity. Standard cost-of-living indices overstate welfare gain in later periods due to a changing composition of buyers.
Keywords: Consumer Demand; Durable Goods; Dynamic Model
JEL Codes: C23; E31; L1; L13; L68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumer expectations about future prices (D84) | Purchase decisions (D12) |
| Transitory industry-wide price shock (L90) | One-year elasticity (C29) |
| Transitory industry-wide price shock (L90) | One-month elasticity (D11) |
| Changing composition of buyers (D16) | Welfare gains in later periods (D69) |
| High-value consumers owning camcorders (D16) | Sales increase from price declines (E31) |