HOW LARGE ARE NON-BUDGET-CONSTRAINT EFFECTS OF PRICES ON DEMAND?

Ori Heffetz and Moses Shayo

No 53882, Working Papers from American Association of Wine Economists

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.

Keywords: Demand and Price Analysis; Food Consumption/Nutrition/Food Safety; Marketing (search for similar items in EconPapers)
Pages: 54
Date: 2009-07
New Economics Papers: this item is included in nep-exp and nep-mkt
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: How Large Are Non-Budget-Constraint Effects of Prices on Demand? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aawewp:53882

DOI: 10.22004/ag.econ.53882

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