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Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes

  • Mark Coppejans
  • Donna Gilleskie
  • Holger Sieg
  • Koleman Strumpf

We develop a demand model for goods that are subject to habit formation. We show that consumption plans of forward looking individuals depend on preferences, current period prices, and individual beliefs about the evolution of future prices. Moreover, an increase in price uncertainty reduces consumption along the optimal path. With smoking as our application, we test the predictions of our model using a unique data set of prices for cigarettes and the restricted use version of the National Education Longitudinal Study. 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.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2006-E43.

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Handle: RePEc:cmu:gsiawp:1147273333
Contact details of provider: Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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  24. Peter Arcidiacono, Holger Sieg, Frank Sloan, 2001. "Living Rationally Under the Volcano? Heavy Drinking and Smoking Among the Elderly," Computing in Economics and Finance 2001 207, Society for Computational Economics.
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