Demand estimation when consumers select prices and quantities (with Richard Blundell and Joel Horowitz)

Abstract

We consider the consumer demand for apparently homogeneous goods. Even though a product itself may be identical, for example a litre of diesel motor fuel, posted prices may differ due to differences in store location and host of other factors. Rather than take a stand on why posted prices vary across locations we address this challenge through a continuous nested multinomial demand model in which consumers choose whether or not to make a purchase, and if so, at which price to buy and which quantity to purchase. We estimate the model for diesel fuel purchases in Germany, by combining detailed household purchase diaries with the universe of prices posted by local stations. We find consumers endogenously select from the posted price distribution when making purchases. The model provides a close fit to the distribution of purchase prices and purchased quantities. We find that both purchase/no-purchase decisions as well as price-quantity choices vary by income group. The estimated model is used to predict responses to counterfactual changes in the price distribution, and we contrast ad valorem taxes with unit taxes

Biography

Matthias Parey is Professor in the School of Social Sciences (Economics) at the University of Surrey. Matthias is also Research Fellow at the Institute for Fiscal Studies (IFS) and Editor of Fiscal Studies. He is Research Fellow at the Institute for the Study of Labor (IZA), the Centre for European Economic Research in Mannheim (ZEW) the ROCKWOOL Foundation Berlin, and Fellow at the Institute for Sustainability (University of Surrey). He completed his PhD in Economics at University College London (UCL). View his personal website.

Contact

Email ifs@surrey.ac.uk for the Teams link and with any questions.