Measuring the Implications of Sales and Consumer Inventory Behavior

50 Pages Posted: 8 Jun 2005

See all articles by Igal Hendel

Igal Hendel

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Aviv Nevo

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 2005

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 mis-measure 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 to other products by up to a factor of 5; and (iii) overestimate the substitution to the no purchase, or outside option, by over 200 percent.

Suggested Citation

Hendel, Igal E. and Nevo, Aviv, Measuring the Implications of Sales and Consumer Inventory Behavior (May 2005). NBER Working Paper No. w11307. Available at SSRN: https://ssrn.com/abstract=714078

Igal E. Hendel (Contact Author)

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Aviv Nevo

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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