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Measuring the Implications of Sales and Consumer Inventory Behavior

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  • Igal Hendel
  • Aviv Nevo

Abstract

Temporary price reductions (sales) are common for many goods and naturally result in large increases in the quantity sold. Demand estimation based on temporary price reductions may mis-measure the long run responsiveness to prices. In this paper we quantify the extent of the problem and assess its economic implications. We structurally estimate a dynamic model of consumer choice using two years of scanner data on the purchasing behavior of a panel of households. The results suggest that static demand estimates, which neglect dynamics: (i) overestimate own price elasticities by 30 percent; (ii) underestimate cross-price elasticities to other products by up to a factor of 5; and (iii) overestimate the substitution to the no purchase, or outside option, by over 200 percent.

Suggested Citation

  • Igal Hendel & Aviv Nevo, 2005. "Measuring the Implications of Sales and Consumer Inventory Behavior," NBER Working Papers 11307, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11307
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    References listed on IDEAS

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    1. Victor Aguirregabiria, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 275-308.
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    3. Hugo Benitez-Silva & John Rust & Gunter Hitsch & Giorgio Pauletto & George Hall, 2000. "A Comparison Of Discrete And Parametric Methods For Continuous-State Dynamic Programming Problems," Computing in Economics and Finance 2000 24, Society for Computational Economics.
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    5. Aguirregabiria, Victor, 2005. "Nonparametric identification of behavioral responses to counterfactual policy interventions in dynamic discrete decision processes," Economics Letters, Elsevier, vol. 87(3), pages 393-398, June.
    6. Jeongwen Chiang, 1991. "A Simultaneous Approach to the Whether, What and How Much to Buy Questions," Marketing Science, INFORMS, vol. 10(4), pages 297-315.
    7. Tülin Erdem & Susumu Imai & Michael Keane, 2003. "Brand and Quantity Choice Dynamics Under Price Uncertainty," Quantitative Marketing and Economics (QME), Springer, vol. 1(1), pages 5-64, March.
    8. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    9. Boztuğ, Yasemin & Bell, David R., 2004. "The Effect of Inventory on Purchase Incidence: Empirical Analysis of Opposing Forces of Storage and Consumption," Papers 2004,43, Humboldt University of Berlin, Center for Applied Statistics and Economics (CASE).
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    JEL classification:

    • G0 - Financial Economics - - General

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