Mark Coppejans Donna Gilleskie Holger Sieg Koleman Strumpf
Abstract
The goal of this paper is to analyze consumer demand in markets with large price uncertainty. We develop a demand model for goods that are subject to habit formation. We show that consumption plans of forward looking individuals depend not only on preferences and current period prices, but also on individual beliefs about the evolution of future prices. Moreover, a mean preserving spread in the price distribution and, hence, an increase in price uncertainty reduces consumption along the optimal path. With smoking as our application, we test the predictions of our model. We use a unique data set of prices for cigarettes collected by the Bureau of Labor Statistics to characterize price uncertainty and price expectations of individuals. We have also obtained access to the restricted use version of the National Education Longitudinal Study, which provides detailed information on smoking behavior of teenagers in the U.S. 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. Moreover, these individuals are less likely to start consuming cigarettes. Our results also provide evidence that young individuals are forward looking. Myopic individuals would not respond to an increase in uncertainty about future prices by reducing consumption.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12156.
Length: Date of creation: Apr 2006 Date of revision: Handle: RePEc:nbr:nberwo:12156
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Find related papers by JEL classification: C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs D8 - Microeconomics - - Information, Knowledge, and Uncertainty I1 - Health, Education, and Welfare - - Health
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Frank J. Chaloupka & Kenneth E. Warner, 1999.
"The Economics of Smoking,"
NBER Working Papers
7047, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Chaloupka, Frank J. & Warner, Kenneth E., 2000.
"The economics of smoking,"
Handbook of Health Economics,
in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 29, pages 1539-1627
Elsevier.
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Stephen G. Cecchetti & Nelson C. Mark & Robert J. Sonora, 2002.
"Price Index Convergence Among United States Cities,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1081-1099, November.
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