Measuring the implications of sales and consumer inventory behavior

Igal Hendel*, Aviv Nevo

*Corresponding author for this work

Research output: Contribution to journalArticle

194 Scopus citations

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 mismeasure 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 by up to a factor of 5, and (iii) overestimate the substitution to the no-purchase or outside option by over 200 percent. This suggests that policy analysis based on static elasticity estimates will underestimate price-cost margins and underpredict the effects of mergers.

Original languageEnglish (US)
Pages (from-to)1637-1673
Number of pages37
JournalEconometrica
Volume74
Issue number6
DOIs
StatePublished - Nov 2006

Keywords

  • Demand anticipation
  • Differentiated products
  • Discrete choice models
  • Long-run price elasticities
  • Stockpiling
  • Storable goods

ASJC Scopus subject areas

  • Economics and Econometrics

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