TY - JOUR AU - Coppejans,Mark AU - Gilleskie,Donna AU - Sieg,Holger AU - Strumpf,Koleman TI - Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes JF - National Bureau of Economic Research Working Paper Series VL - No. 12156 PY - 2006 Y2 - April 2006 UR - http://www.nber.org/papers/w12156 L1 - http://www.nber.org/papers/w12156.pdf N1 - Author contact info: Mark Coppejans Department of Economics Duke University Durham, NC 27708-0097 E-Mail: mtc@econ.duke.edu Donna B. Gilleskie Department of Economics University of North Carolina, Chapel Hill CB #3305, 6B Gardner Hall Chapel Hill, NC 27599-3305 Tel: 919/966-5372 Fax: 919/966-4986 E-Mail: donna_gilleskie@unc.edu Holger Sieg Department of Economics University of Pennsylvania 3718 Locust Walk Philadelphia, PA 19104 Tel: 215 898 7194 Fax: 215-573-2057 E-Mail: holgers@econ.upenn.edu Koleman Strumpf University of Kansas E-Mail: cigar@ku.edu AB - The goal of this paper is to analyze consumer demand in markets with large price uncertainty. We develop a demand model for goods that are subject to habit formation. We show that consumption plans of forward looking individuals depend not only on preferences and current period prices, but also on individual beliefs about the evolution of future prices. Moreover, a mean preserving spread in the price distribution and, hence, an increase in price uncertainty reduces consumption along the optimal path. With smoking as our application, we test the predictions of our model. We use a unique data set of prices for cigarettes collected by the Bureau of Labor Statistics to characterize price uncertainty and price expectations of individuals. We have also obtained access to the restricted use version of the National Education Longitudinal Study, which provides detailed information on smoking behavior of teenagers in the U.S. Our estimation results suggest that teenagers who live in metropolitan areas with a large amount of cigarette price volatility have, on average, significantly lower levels of cigarette consumption. Moreover, these individuals are less likely to start consuming cigarettes. Our results also provide evidence that young individuals are forward looking. Myopic individuals would not respond to an increase in uncertainty about future prices by reducing consumption. ER -