How Large Are Non-Budget-Constraint Effects Of Prices On Demand?
AbstractElementary consumer theory assumes that prices affect demand only because they affect the budget constraint (BC). By contrast, several models suggest that prices can affect demand through other channels (e.g. because they signal quality). This alternative conjecture is consistent with evidence from marketing studies. However, neither theory nor evidence is informative regarding the magnitude of non-BC effects. The key econometric challenge arises from the fact that a change in prices typically also changes the BC. This paper uses a lab and a field experiment to disentangle BC from non-BC effects of prices on demand. In our lab experiment we find that, consistent with marketing evidence, prices positively affect stated willingness to pay. However, when examining actual demand, non-BC price elasticities are considerably smaller than BC price elasticities and are often statistically insignificant. Further, these non-BC elasticities do not increase with product uncertainty. Finally, we do not detect any non-BC effects in our field experiment.
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Bibliographic InfoPaper provided by American Association of Wine Economists in its series Working Papers with number 53882.
Date of creation: Jul 2009
Date of revision:
consumer behavior; demand; price; quality signals; experiments; Demand and Price Analysis; Food Consumption/Nutrition/Food Safety; Marketing; D01; D12; D8; M31;
Other versions of this item:
- Ori Heffetz & Moses Shayo, 2009. "How Large Are Non-Budget-Constraint Effects of Prices on Demand?," American Economic Journal: Applied Economics, American Economic Association, vol. 1(4), pages 170-99, October.
- C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-24 (All new papers)
- NEP-EXP-2009-10-24 (Experimental Economics)
- NEP-MKT-2009-10-24 (Marketing)
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EIEF Working Papers Series
1214, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2012.
- Giovanni Mastrobuoni & Franco Peracchi & Aleksey Tetenov, 2012. "Price as a signal of product quality: some experimental evidence," Carlo Alberto Notebooks 268, Collegio Carlo Alberto, revised 2013.
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