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How Large Are Non-Budget-Constraint Effects of Prices on Demand?

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Author Info

  • Ori Heffetz
  • Moses Shayo

Abstract

Elementary consumer theory assumes prices affect demand only because they affect the budget constraint (BC). Alternative models, and some evidence, suggest prices can affect demand through other, non-BC channels (e.g., by signaling quality). This paper uses a lab and a field experiment to disentangle BC from non-BC effects of prices on demand. In the lab, we find that although prices positively affect stated willingness to pay, non-BC price elasticities are considerably smaller than BC price elasticities, are often statistically insignificant, and do not increase with product uncertainty. We do not detect any non-BC effects in our field experiment. (JEL C93, D12, M31)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/app.1.4.170
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File URL: http://www.aeaweb.org/aej/app/data/2008-0232_data.zip
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Applied Economics.

Volume (Year): 1 (2009)
Issue (Month): 4 (October)
Pages: 170-99

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Handle: RePEc:aea:aejapp:v:1:y:2009:i:4:p:170-99

Note: DOI: 10.1257/app.1.4.170
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Cited by:
  1. Pascaline Dupas, 2010. "Short-Run Subsidies and Long-Run Adoption of New Health Products: Evidence from a Field Experiment," Working Papers id:2498, eSocialSciences.
  2. Giovanni Mastrobuoni & Franco Peracchi & Aleksey Tetenov, 2012. "Price as a signal of product quality: Some experimental evidence," EIEF Working Papers Series 1214, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2012.
  3. Ashraf, Nava & Jack, B. Kelsey & Kamenica, Emir, 2013. "Information and subsidies: Complements or substitutes?," Journal of Economic Behavior & Organization, Elsevier, vol. 88(C), pages 133-139.

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