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Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes
Coppejans, Mark Gilleskie, Donna Sieg, Holger Strumpf, Koleman
Coppejans, Mark
Gilleskie, Donna
Sieg, Holger
Strumpf, Koleman
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Abstract
We develop a demand model for goods that are subject to habit
formation. We show that consumption plans of forward-looking individuals
depend on preferences, current period prices, and individual beliefs
about the evolution of future prices. Moreover, an increase in price
uncertainty reduces consumption along the optimal path.With smoking as
our application, we test the predictions of our model using a unique data
set of prices for cigarettes and the restricted-use version of the National
Education Longitudinal Study. Our estimation results suggest that teenagers
who live in metropolitan areas with a large amount of cigarette price
volatility have, on average, significantly lower levels of cigarette consumption.
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© 2007 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology
Date
2007-08
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MIT Press
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Coppejans, Mark, Donna Gilleskie, Holger Sieg, and Koleman Strumpf (2007), "Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes," Review of Economics and Statistics, 89 (3), 510-521.