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Home
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Working Papers
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How Large Are Non-Budget-Constraint Effects of Prices on Demand?

Working Paper No. 39

Published: 2009
Category:
Economics

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

Ori Heffetz & Moses Shayo
Full Text PDF
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.

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Please send your papers as PDF files to the editor, Victor Ginsburgh, at vginsbur@ulb.ac.be
Papers will be quickly reviewed, prior to potential posting on the website. Decision will be to post or not, possibly with short comments, but without referee reports. The decision will be based primarily on the suitability of the paper’s topic to the aims of the Association.
Such decisions are independent of publication decisions for the Journal of Wine Economics.

Working Paper publication requires that at least one author
is a regular member of AAWE.

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