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How Large Are Non-Budget-Constraint Effects Of Prices On Demand?

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  • Heffetz, Ori
  • Shayo, Moses

Abstract

Elementary 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.

Suggested Citation

  • Heffetz, Ori & Shayo, Moses, 2009. "How Large Are Non-Budget-Constraint Effects Of Prices On Demand?," Working Papers 53882, American Association of Wine Economists.
  • Handle: RePEc:ags:aawewp:53882
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    File URL: http://purl.umn.edu/53882
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    Cited by:

    1. repec:eee:jeeman:v:84:y:2017:i:c:p:209-222 is not listed on IDEAS
    2. Greg Fischer & Dean Karlan & Margaret McConnell & Pia Raffler, 2014. "To Charge or Not to Charge: Evidence from a Health Products Experiment in Uganda," Working Papers 1041, Economic Growth Center, Yale University.
    3. Qihua Liu & Shan Huang & Liyi Zhang, 2016. "The influence of information cascades on online purchase behaviors of search and experience products," Electronic Commerce Research, Springer, vol. 16(4), pages 553-580, December.
    4. Pascaline Dupas, 2014. "Short‐Run Subsidies and Long‐Run Adoption of New Health Products: Evidence From a Field Experiment," Econometrica, Econometric Society, vol. 82(1), pages 197-228, January.
    5. B Kelsey Jack, "undated". "Market Inefficiencies and the Adoption of Agricultural Technologies in Developing Countries," CID Working Papers 50, Center for International Development at Harvard University.
    6. Mastrobuoni, Giovanni & Peracchi, Franco & Tetenov, Aleksey, 2014. "Price as a Signal of Product Quality: Some Experimental Evidence," Journal of Wine Economics, Cambridge University Press, vol. 9(02), pages 135-152, August.
    7. Ashraf, Nava & Jack, B. Kelsey & Kamenica, Emir, 2013. "Information and subsidies: Complements or substitutes?," Journal of Economic Behavior & Organization, Elsevier, vol. 88(C), pages 133-139.

    More about this item

    Keywords

    consumer behavior; demand; price; quality signals; experiments; Demand and Price Analysis; Food Consumption/Nutrition/Food Safety; Marketing; D01; D12; D8; M31;

    JEL classification:

    • 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; Personnel Economics - - Marketing and Advertising - - - Marketing

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