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

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  • 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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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. Greg Fischer & Dean Karlan & Margaret McConnell & Pia Raffler, 2014. "To Charge or Not to Charge: Evidence from a Health Products Experiment in Uganda," NBER Working Papers 20170, National Bureau of Economic Research, Inc.
  2. Ashraf, Nava & Jack, B. Kelsey & Kamenica, Emir, 2013. "Information and subsidies: Complements or substitutes?," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 88(C), pages 133-139.
  3. Giovanni Mastrobuoni & Franco Peracchi & Aleksey Tetenov, 2012. "Price as a signal of product quality: some experimental evidence," Carlo Alberto Notebooks, Collegio Carlo Alberto 268, Collegio Carlo Alberto, revised 2013.
  4. Pascaline Dupas, 2010. "Short-Run Subsidies and Long-Run Adoption of New Health Products: Evidence from a Field Experiment," Working Papers id:2498, eSocialSciences.
  5. Greg Fischer & Dean Karlan & Margaret McConnell & Pia Raffler, 2014. "To Charge or Not to Charge: Evidence from a Health Products Experiment in Uganda," Working Papers, Economic Growth Center, Yale University 1041, Economic Growth Center, Yale University.

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