Do consumers correctly expect price reductions? Testing dynamic behavior

Philippe Février and Lionel Wilner

International Journal of Industrial Organization, 2016, vol. 44, issue C, 25-40

Abstract: The assumption that consumers are fully rational and hold correct price expectations is demanding in dynamic settings. We claim that it is testable provided that market-level data on prices and purchases are available. We find that consumers hold simple expectations regarding the timing of promotions for music albums: consumers act as if they were aware of reductions but did not revise their beliefs over time. The anticipation effect, due to strategically delaying purchase, amounts to 1/5 of the decision to purchase during regular periods. These results have implications in terms of demand estimation, optimal pricing and welfare computations.

Keywords: Testing expectations; Demand models; Promotions; Perfect foresight; Myopia; Time-independent beliefs (search for similar items in EconPapers)
JEL-codes: D11 D12 D22 D84 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: Do consumers correctly expect price reductions? Testing dynamic behavior (2016)
Working Paper: Do Consumers Correctly Expect Price Reductions? Testing Dynamic Behavior (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:44:y:2016:i:c:p:25-40

DOI: 10.1016/j.ijindorg.2015.10.003

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