Quantitative Marketing and Economics

, Volume 4, Issue 4, pp 325–349 | Cite as

Intertemporal effects of consumption and their implications for demand elasticity estimates

Article

Abstract

Consumption of a good typically diminishes the marginal utility of consuming more, but for how long? This paper adapts a model of consumption capital to allow consumption to have a lasting effect that diminishes the marginal utility of future consumption. Estimates of the model find that it takes the 25th, median and 75th percentile of consumers 19, 32 and 43 days for their marginal utilities to return to pre-consumption levels, and they are forward-looking with respect to these effects. This generates intertemporal substitution of consumption that leads to an overestimate of the own-price elasticity of demand of ten percent when it is estimated using temporary price changes. In addition to these implications consumption effects share with those of durable and storable goods, consumption effects also raise concerns for capacity constrained industries because the timing of consumption affects capacity utilization. In the empirical application in this paper, price variation in one time period generates substantial changes in capacity utilization in that period, but minimal changes in other periods because the intertemporal substitution is spread over many time periods.

Keywords

Consumption Discrete choice Dynamic programming Random coefficients 

Notes

Acknowledgment

I am grateful to Dan Ackerberg, Phillip Leslie, Andrew Ainslie, Lanier Benkard, Latika Chaudhary, Harold Demsetz, Michaela Draganska, JP Dube, Joe Hotz, Matt Neidell, Aviv Nevo, two anonymous reviewers and seminar participants at UCLA, Stanford GSB, Penn State, UBC, UC Berkeley Haas School of Business, and University of Chicago GSB for their helpful comments.I would also like to thank Ken Guerra and Steve Fendrick at American Golf for providing the data.All errors are mine.

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Copyright information

© Springer Science + Business Media, LLC 2006

Authors and Affiliations

  1. 1.Graduate School of BusinessStanford UniversityStanfordUSA

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