Measuring the Implications of Sales and Consumer Inventory Behavior

NBER Working Paper No. 11307^*
Issued in May 2005
NBER Program(s): IO

---- 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.

^*Published: Igal Hendel & Aviv Nevo, 2006.
"Measuring the Implications of Sales and Consumer Inventory Behavior," Econometrica, Econometric Society, vol. 74(6), pages 1637-1673, November.

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