Department of Economics
Durham, NC 27708-0097
NBER Working Papers and Publications
|April 2006||Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes|
with Donna Gilleskie, Holger Sieg, Koleman Strumpf: w12156
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 versi...
Published: Coppejans, M., Gilleskie, D., Sieg, H. and K. Strumpf. "Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes.” Review of Economics and Statistics 89,3 (2007): 510-521. citation courtesy of
|July 2002||Price Uncertainty, Tax Policy, and Addiction: Evidence and Implications|
with Holger Sieg: w9073
Consumption of addictive goods is subject to habit formation. Forward-looking individuals must, therefore, be concerned about future prices when making current consumption decisions. We study prices for tobacco products based on a unique data set provided by the Bureau of Labor Statistics. Our empirical findings suggest that prices have been highly volatile during the past decade. Price uncertainty has a potentially large impact on the economic well-being of young individuals with relatively low levels of disposable income. We develop a model to study consumption of addictive substances under price uncertainty. Our results indicate that optimal decision rules of low income individuals can crucially depend on subjective beliefs about future prices and the length of the planning horizon. The...