Consumer stockpiling and demand elasticity biases: A theoretical note with applications

Ruochen Li

Manchester School, 2021, vol. 89, issue 6, 610-618

Abstract: Consumer stockpiling can result in biased empirical estimates of own‐ and cross‐price elasticities of demand with significant implications for a range of policy issues. To further the theoretical understanding of such biases, I develop a simple, yet general theoretical framework. For any given demand and prices, I show both the own‐ and cross‐price elasticities biases can be over‐ or underestimated depending upon a single intuitive condition. I then illustrate the importance of these insights by applying them to some example applications, including the measurement of market power and the estimated effects of tax increases on consumption.

Date: 2021
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