Rational Addiction with Optimal Inventories: Theory and Evidence from Cigarette Purchases in Japan

Junmin Wan ()

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: A model of rational addiction (RA) with optimal inventories is developed and empirically tested using data on purchases in Japan. If a consumer has information regarding a future price increase, then she may hoard addictive goods; in this case, the optimal inventory period increases with the price hike but decreases with the inventory cost. Owing to the creation of such inventories by consumers, the absolute value of the price elasticity of demand is smaller in the case of a price increase than in that of a price decrease, and this difference is especially salient in the short-run. The evidence provided by daily cigarette purchases is consistent with this asymmetric price effect. Monthly cigarette purchase data do not support the RA hypothesis when inventory is ignored, as inventory becomes an omitted variable that correlates with price; however, this hypothesis does find support if inventory is identified in the demand equation.

Date: 2005-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.iser.osaka-u.ac.jp/static/resources/docs/dp/2005/DP0641.pdf

Related works:
Working Paper: Rational Addiction with Optimal Inventories: Theory and Evidence from Cigarette Purchases in Japan (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:0641

Access Statistics for this paper

More papers in ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka Contact information at EDIRC.
Bibliographic data for series maintained by Librarian ().