Econometrica: Nov 2006, Volume 74, Issue 6

Measuring the Implications of Sales and Consumer Inventory Behavior

https://doi.org/10.1111/j.1468-0262.2006.00721.x
p. 1637-1673

Igal Hendel, Aviv Nevo

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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Supplemental Material

Supplementary Material for "Measuring the Implications of Sales and Consumer Inventory Behavior" Part 1

The files in Supplementary Matetrial for "Measuring the Implications of Sales and Consumer Inventory Behavior" Part 1, Part 2 and Part 3, generate the main results in the Hendel-Nevo paper.The key files are:1) 1st_stage.do - which is a Stata file that runs the first stage results. It was run using STATA 8.1 SE2) run_results.m - which is a Matlab file that runs the dynamic estimation. It was run using MATLAB 6.5 with Statistics and Optimization Toolboxes.The rest of the files are input and data files called by these programs. All files, from all three zip files, should be in the same directory.

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Supplementary Material for "Measuring the Implications of Sales and Consumer Inventory Behavior" Part 2

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Supplementary Material for "Measuring the Implications of Sales and Consumer Inventory Behavior" Part 3

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