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American Economic Journal: Applied Economics: Vol. 1 No. 4 (October 2009)

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How Large Are Non-Budget-Constraint Effects of Prices on Demand?

Article Citation

Heffetz, Ori, and Moses Shayo. 2009. "How Large Are Non-Budget-Constraint Effects of Prices on Demand?" American Economic Journal: Applied Economics, 1(4): 170-99.

DOI: 10.1257/app.1.4.170

Abstract

Elementary consumer theory assumes prices affect demand only because they affect the budget constraint (BC). Alternative models, and some evidence, suggest prices can affect demand through other, non-BC channels (e.g., by signaling quality). This paper uses a lab and a field experiment to disentangle BC from non-BC effects of prices on demand. In the lab, we find that although prices positively affect stated willingness to pay, non-BC price elasticities are considerably smaller than BC price elasticities, are often statistically insignificant, and do not increase with product uncertainty. We do not detect any non-BC effects in our field experiment. (JEL C93, D12, M31)

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Authors

Heffetz, Ori (Cornell U)
Shayo, Moses (Hebrew U Jerusalem)

JEL Classifications

C93: Field Experiments
D12: Consumer Economics: Empirical Analysis
M31: Marketing

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