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The Biases in Applying Static Demand Models under Dynamic Demand

Takeshi Fukasawa
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Takeshi Fukasawa: Graduate School of Economics, The University of Tokyo and Junior Research Fellow, Research Institute for Economics and Business Administration, Kobe University, JAPAN

No DP2022-18, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: This article analytically investigates the mechanism behind the biases in price elasticities of demand in applying static demand models under dynamic demand, which has been pointed out by the previous empirical studies. There are three sources of biases: disregard of state variables (affecting short-run elasticity), inconsistent utility parameter estimates, and changing expectations of consumers (affecting long-run elasticity). Disregard of state variables, such as durable product holdings, leads to overestimate of short-run own elasticities. Especially when the focus is on the large conditional choice probability products, the first and the third sources of biases might induce large biases in price elasticities.

Keywords: Dynamic demand; Static demand model; Estimation bias; Price elasticity of demand; Dynamic discrete choice (search for similar items in EconPapers)
Pages: 44 pages
Date: 2022-04, Revised 2022-07
New Economics Papers: this item is included in nep-com, nep-dcm and nep-upt
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https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2022-18.pdf Revised version, 2022 (application/pdf)

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