Journal
ECONOMETRICA
Volume 74, Issue 6, Pages 1637-1673Publisher
BLACKWELL PUBLISHING
DOI: 10.1111/j.1468-0262.2006.00721.x
Keywords
long-run price elasticities; stockpiling; demand anticipation; discrete choice models; differentiated products; storable goods
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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 mismeasure 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 by up to a factor of 5, and (iii) overestimate the substitution to the no-purchase or outside option by over 200 percent. This suggests that policy analysis based on static elasticity estimates will underestimate price-cost margins and underpredict the effects of mergers.
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