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Do consumers correctly expect price reductions? Testing dynamic behavior

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  • Février, Philippe
  • Wilner, Lionel

Abstract

The assumption that consumers are fully rational and hold correct price expectations is demanding in dynamic settings. We claim that it is testable provided that market-level data on prices and purchases are available. We find that consumers hold simple expectations regarding the timing of promotions for music albums: consumers act as if they were aware of reductions but did not revise their beliefs over time. The anticipation effect, due to strategically delaying purchase, amounts to 1/5 of the decision to purchase during regular periods. These results have implications in terms of demand estimation, optimal pricing and welfare computations.

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  • Février, Philippe & Wilner, Lionel, 2016. "Do consumers correctly expect price reductions? Testing dynamic behavior," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 25-40.
    • Handle: RePEc:eee:indorg:v:44:y:2016:i:c:p:25-40
    DOI: 10.1016/j.ijindorg.2015.10.003
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    More about this item

    Keywords

    Testing expectations; Demand models; Promotions; Perfect foresight; Myopia; Time-independent beliefs;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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