Measuring the Implications of Sales and Consumer Inventory Behavior

Authors


  • We wish to thank David Bell for the data, Michael Keane, Ariel Pakes, John Rust, a co-editor, Glenn Ellison, four anonymous referees, and seminar participants in several workshops for comments and suggestions. We gratefully acknowledge support from the NSF (Grants SES-0093967 and SES-0213976). The second author also thanks the Sloan Foundation for support through a Sloan Research Fellowship.

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 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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