Between preferences and references: Evidence from Great Britain on asymmetric price elasticities

Laura Cornelsen (), Mario Mazzocchi and Richard Smith ()
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Laura Cornelsen: London School of Hygiene and Tropical Medicine, Fac. Public Health and Policy
Richard Smith: London School of Hygiene and Tropical Medicine, Fac. Public Health and Policy

No 1, Quaderni di Dipartimento from Department of Statistics, University of Bologna

Abstract: Canonical demand studies and fiscal policy simulations rest on the assumption that consumers react symmetrically to price increases and decreases. We propose a theoretically consistent demand system which allows for asymmetric response by incorporating reference prices into both own- and cross-prices. Applying the system to a large and detailed home-scan household-level data-set with food prices and purchases from Great Britain, we show evidence on asymmetric consumer response and loss aversion, with a stronger response when prices rise above their reference level. Results are robust to changes in the price definition and model speci cation, and a simulation shows that ignoring asymmetry may lead to important biases.

Keywords: Reference Price; Price Elasticities; Demand System; Food Prices; Loss Aversion (search for similar items in EconPapers)
Pages: 34
Date: 2018
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (4)

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