How large are non-budget-constraint effects of prices on demand?

Ori Heffetz*, Moses Shayo

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

15 Scopus citations

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.

Original languageAmerican English
Pages (from-to)170-199
Number of pages30
JournalAmerican Economic Journal: Applied Economics
Volume1
Issue number4
DOIs
StatePublished - Oct 2009

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