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How Large are Non-Budget-Constraint Effects of Prices on Demand?

American Economic Journal: Applied Economics, Vol. 1, No. 4, pp. 170–199

53 Pages Posted: 16 May 2008 Last revised: 28 Apr 2010

Ori Heffetz

Cornell University - S.C. Johnson Graduate School of Management; Hebrew University of Jerusalem; National Bureau of Economic Research (NBER)

Moses Shayo

The Hebrew University of Jerusalem - Department of Economics

Date Written: March 19, 2009

Abstract

Elementary consumer theory assumes that prices affect demand only because they affect the budget constraint (BC). By contrast, several models suggest that prices can affect demand through other channels (e.g. because they signal quality). This alternative conjecture is consistent with evidence from marketing studies. However, neither theory nor evidence is informative regarding the magnitude of non-BC effects. The key econometric challenge arises from the fact that a change in prices typically also changes the BC. This paper uses a lab and a field experiment to disentangle BC from non-BC effects of prices on demand. In our lab experiment we find that, consistent with marketing evidence, prices positively affect stated willingness to pay. However, when examining actual demand, non-BC price elasticities are considerably smaller than BC price elasticities and are often statistically insignificant. Further, these non-BC elasticities do not increase with product uncertainty. Finally, we do not detect any non-BC effects in our field experiment.

Keywords: consumer behavior, demand, price, quality signals, experiments

JEL Classification: D01, D12, D8, M31

Suggested Citation

Heffetz, Ori and Shayo, Moses, How Large are Non-Budget-Constraint Effects of Prices on Demand? (March 19, 2009). American Economic Journal: Applied Economics, Vol. 1, No. 4, pp. 170–199. Available at SSRN: https://ssrn.com/abstract=1133342 or http://dx.doi.org/10.2139/ssrn.1133342

Ori Heffetz

Cornell University - S.C. Johnson Graduate School of Management ( email )

324 Sage Hall
Ithaca, NY 14853
United States

Hebrew University of Jerusalem

Mount Scopus
Jerusalem, IL 91905
Israel

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/~heffetz

Moses Shayo (Contact Author)

The Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, IL 91905
Israel

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