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Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes

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Author Info

  • Mark Coppejans

    (Barclays Global Investors)

  • Donna Gilleskie

    (University of North Carolina at Chapel Hill and NBER)

  • Holger Sieg

    (Carnegie Mellon University and NBER)

  • Koleman Strumpf

    (Kansas School of Business)

Abstract

We develop a demand model for goods that are subject to habit formation. We show that consumption plans of forward-looking individuals depend on preferences, current period prices, and individual beliefs about the evolution of future prices. Moreover, an increase in price uncertainty reduces consumption along the optimal path. With smoking as our application, we test the predictions of our model using a unique data set of prices for cigarettes and the restricted-use version of the National Education Longitudinal Study. Our estimation results suggest that teenagers who live in metropolitan areas with a large amount of cigarette price volatility have, on average, significantly lower levels of cigarette consumption. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 89 (2007)
Issue (Month): 3 (August)
Pages: 510-521

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Handle: RePEc:tpr:restat:v:89:y:2007:i:3:p:510-521

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References

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  1. Donna B. Gilleskie & Koleman S. Strumpf, 2000. "The Behavioral Dynamics of Youth Smoking," NBER Working Papers 7838, National Bureau of Economic Research, Inc.
  2. Tülin Erdem & Michael P. Keane, 1996. "Decision-Making Under Uncertainty: Capturing Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets," Marketing Science, INFORMS, vol. 15(1), pages 1-20.
  3. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, vol. 84(3), pages 396-418, June.
  4. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
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  6. Chaloupka, Frank, 1991. "Rational Addictive Behavior and Cigarette Smoking," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 722-42, August.
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Citations

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Cited by:
  1. Elie Appelbaum & Aman Ullah, 1997. "Estimation Of Moments And Production Decisions Under Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 631-637, November.
  2. Yu-Fu Chen & Dennis Petrie, 2012. "When to Quit Under Uncertainty? A real options approach to smoking cessation," Dundee Discussion Papers in Economics 272, Economic Studies, University of Dundee.
  3. Sophie Massin, 2011. "La notion d'addiction en économie : La théorie du choix rationnel à l'épreuve," Revue d'économie politique, Dalloz, vol. 121(5), pages 713-750.
  4. Dimitris Christelis & Anna Sanz-de-Galdeano, 2009. "Smoking Persistence in Europe: A Semi-Parametric Panel Data Analysis with Selectivity," Working Papers 403, Barcelona Graduate School of Economics.
  5. Scott, K. Rebecca, 2013. "Demand and Price Uncertainty: Rational Habits in International Gasoline Demand," CUDARE Working Paper Series 1131, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  6. Dimitrios Christelis & Anna Sanz-de-Galdeano, 2009. "Smoking Persistence Across Countries: An Analysis Using Semi-Parametric Dynamic Panel Data Models with Selectivity," CSEF Working Papers 236, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  7. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
  8. Cowan, Benjamin W., 2011. "Forward-thinking teens: The effects of college costs on adolescent risky behavior," Economics of Education Review, Elsevier, vol. 30(5), pages 813-825, October.
  9. K. Rebecca Scott, 2012. "Rational Habits and Uncertain Prices: Simulating Gasoline Consumption Behavior," Economics Series Working Papers 596, University of Oxford, Department of Economics.
  10. Scott, K. Rebecca, 2011. "Demand and price volatility: rational habits in international gasoline demand," CUDARE Working Paper Series 1122, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  11. Ciliberto, Federico & Kuminoff, Nicolai, 2010. "Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry," MPRA Paper 24883, University Library of Munich, Germany.
  12. Christelis, Dimitris & Sanz-de-Galdeano, Anna, 2011. "Smoking persistence across countries: A panel data analysis," Journal of Health Economics, Elsevier, vol. 30(5), pages 1077-1093.

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