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Measuring the Implications of Sales and Consumer Inventory Behavior

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  • 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 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. Copyright The Econometric Society 2006.

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File URL: http://hdl.handle.net/10.1111/j.1468-0262.2006.00721.x
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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 74 (2006)
Issue (Month): 6 (November)
Pages: 1637-1673

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Handle: RePEc:ecm:emetrp:v:74:y:2006:i:6:p:1637-1673

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  1. David R. Bell & Jeongwen Chiang & V. Padmanabhan, 1999. "The Decomposition of Promotional Response: An Empirical Generalization," Marketing Science, INFORMS, vol. 18(4), pages 504-526.
  2. Boizot, Christine & Robin, Jean-Marc & Visser, Michael, 2001. "The Demand for Food Products: An Analysis of Interpurchase Times and Purchased Quantities," Economic Journal, Royal Economic Society, vol. 111(470), pages 391-419, April.
  3. Hugo Benitez-Silva & John Rust & Gunter Hitsch & Giorgio Pauletto & George Hall, 2000. "A Comparison Of Discrete And Parametric Methods For Continuous-State Dynamic Programming Problems," Computing in Economics and Finance 2000 24, Society for Computational Economics.
  4. Victor Aguirregabiria, 2004. "Nonparametric Identification of Behavioral Responses to Counterfactual Policy Interventions in Dynamic Discrete Decision Processes," Econometrics 0408004, EconWPA.
  5. Jeongwen Chiang, 1991. "A Simultaneous Approach to the Whether, What and How Much to Buy Questions," Marketing Science, INFORMS, vol. 10(4), pages 297-315.
  6. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  7. Aguirregabiria, Victor, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 275-308, April.
  8. Erdem, Tulin & Imai, Susumu & Keane, Michael, 2003. "Brand and Quantity Choice Dynamics Under Price Uncertainty," MPRA Paper 52516, University Library of Munich, Germany.
  9. Boztuğ, Yasemin & Bell, David R., 2004. "The Effect of Inventory on Purchase Incidence: Empirical Analysis of Opposing Forces of Storage and Consumption," Papers 2004,43, Humboldt-Universität Berlin, Center for Applied Statistics and Economics (CASE).
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