The Biases in Applying Static Demand Models under Dynamic Demand

This article analytically investigates the mechanism behind the biases in price elasticities of demand in applying static demand models under dynamic demand, which has been pointed out by the previous empirical studies. There are three sources of biases: disregard of state variables (affecting short-run elasticity), inconsistent utility parameter estimates, and changing expectations of consumers (affecting long-run elasticity). Disregard of state variables, such as durable product holdings, leads to overestimate of short-run own elasticities. Especially when the focus is on the large conditional choice probability products, the first and the third sources of biases might induce large biases in price elasticities.