Identification and Estimation of Forward-looking Behavior: The Case of Consumer Stockpiling
Andrew Ching () and
Matthew Osborne ()
Additional contact information
Matthew Osborne: University of Toronto
No GRU_2019_023, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit
Understanding how forward-looking consumers respond to price promotions in storable goods markets is an important area of research in empirical marketing and industrial organization. In prior work, researchers have assumed that consumers in these markets are very forward-looking, and calibrated their weekly discount factors to levels around 0.9995. This calibration has been used because earlier research has assumed that a consumer’s storage cost is a continuous func- tion of inventory, which rules out exclusion restrictions that can be used to identify the discount factor. We show that by properly modeling storage cost as a step function of inventory (be- cause storage cost depends on the number of packages stored, instead of the actual amount of inventory), natural exclusion restrictions arise that allow for the discount factor to be point identified. In an application to a storable good category, we find that weekly discount factors are very heterogeneous across consumers, and are on average 0.71. We show through a counter- factual exercise that if one used a model which fixed the discount factor to be consistent with the standard calibrated value, one would overpredict the effect of increased promotional depth for a product on its quantity sold by 18% in the short-term, and 15% in the long-term.
Keywords: Discount Factor; Exclusion Restriction; Stockpiling; Dynamic Programming (search for similar items in EconPapers)
Pages: 37 pages
New Economics Papers: this item is included in nep-com, nep-dcm and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cth:wpaper:gru_2019_023
Access Statistics for this paper
More papers in GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit Contact information at EDIRC.
Bibliographic data for series maintained by GRU ().