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How Large Are Non-Budget-Constraint Effects of Prices on Demand?

  • Ori Heffetz
  • Moses Shayo

Elementary consumer theory assumes prices affect demand only because they affect the budget constraint (BC). Alternative models, and some evidence, suggest prices can affect demand through other, non-BC channels (e.g., by signaling quality). This paper uses a lab and a field experiment to disentangle BC from non-BC effects of prices on demand. In the lab, we find that although prices positively affect stated willingness to pay, non-BC price elasticities are considerably smaller than BC price elasticities, are often statistically insignificant, and do not increase with product uncertainty. We do not detect any non-BC effects in our field experiment. (JEL C93, D12, M31)

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Article provided by American Economic Association in its journal American Economic Journal: Applied Economics.

Volume (Year): 1 (2009)
Issue (Month): 4 (October)
Pages: 170-99

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Handle: RePEc:aea:aejapp:v:1:y:2009:i:4:p:170-99
Note: DOI: 10.1257/app.1.4.170
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