Identification and Estimation of Forward-Looking Behavior: The Case of Consumer Stockpiling

56 Pages Posted: 15 Apr 2015 Last revised: 25 Aug 2019

See all articles by Andrew T. Ching

Andrew T. Ching

Johns Hopkins University - Carey Business School

Matthew Osborne

University of Toronto at Mississauga - Department of Management

Date Written: July 25, 2019

Abstract

Understanding how forward-looking consumers respond to price promotions in storable goods markets is an important area of research in empirical marketing and industrial organization. In prior work, researchers have assumed that consumers in these markets are very forward-looking, and calibrated their weekly discount factors to levels around 0.9995. This calibration has been used because earlier research has assumed that a consumer's storage cost is a continuous function of inventory, which rules out exclusion restrictions that can be used to identify the discount factor. We show that by properly modeling storage cost as a step function of inventory (because storage cost depends on the number of packages stored, instead of the actual amount of inventory), natural exclusion restrictions arise that allow for the discount factor to be point identified. In an application to a storable good category, we find that weekly discount factors are very heterogeneous across consumers, and are on average 0.71. We show through a counterfactual exercise that if one used a model which fixed the discount factor to be consistent with the standard calibrated value, one would overpredict the effect of increased promotional depth for a product on its quantity sold by 18% in the short-term, and 15% in the long-term.

Keywords: Discount Factor, Exclusion Restriction, Stockpiling, Dynamic Programming

JEL Classification: C11, C35, C61, D91, L51, M21, M31

Suggested Citation

Ching, Andrew T. and Osborne, Matthew, Identification and Estimation of Forward-Looking Behavior: The Case of Consumer Stockpiling (July 25, 2019). Forthcoming in Marketing Science, Rotman School of Management Working Paper No. 2594032 , Available at SSRN: https://ssrn.com/abstract=2594032 or http://dx.doi.org/10.2139/ssrn.2594032

Andrew T. Ching

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Matthew Osborne (Contact Author)

University of Toronto at Mississauga - Department of Management ( email )


Canada

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