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Rational Addiction with Optimal Inventories: Theory and Evidence from Cigarette Purchases in Japan

  • Junmin Wan

    ()

    (Osaka School of International Public Policy, Osaka University)

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    A rational addiction (RA) model with optimal inventories is developed and empirically tested. Consumers hoard addictive goods when they anticipate a future price increase. The optimal inventory period increases with the size of the price hike but decreases with inventory costs. The absolute value of the price elasticity of demand is smaller in the case of a price increase than in the case of a price decrease. Evidence from daily cigarette purchases in Japan is consistent with this asymmetric price effect. If inventories are ignored, monthly cigarette purchases reject the RA hypothesis inasmuch as inventories are an omitted variable correlated with price; but this hypothesis finds support if inventories are controlled for.

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    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 04-01-Rev.

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    Length: 48 pages
    Date of creation: Jan 2004
    Date of revision: Feb 2006
    Handle: RePEc:osk:wpaper:0401r
    Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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