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Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes

Author

Listed:
  • Mark Coppejans
  • Donna Gilleskie
  • Holger Sieg
  • Koleman Strumpf
Abstract
The goal of this paper is to analyze consumer demand in markets with large price uncertainty. We develop a demand model for goods that are subject to habit formation. We show that consumption plans of forward looking individuals depend not only on preferences and current period prices, but also on individual beliefs about the evolution of future prices. Moreover, a mean preserving spread in the price distribution and, hence, an increase in price uncertainty reduces consumption along the optimal path. With smoking as our application, we test the predictions of our model. We use a unique data set of prices for cigarettes collected by the Bureau of Labor Statistics to characterize price uncertainty and price expectations of individuals. We have also obtained access to the restricted use version of the National Education Longitudinal Study, which provides detailed information on smoking behavior of teenagers in the U.S. 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. Moreover, these individuals are less likely to start consuming cigarettes. Our results also provide evidence that young individuals are forward looking. Myopic individuals would not respond to an increase in uncertainty about future prices by reducing consumption.

Suggested Citation

  • Mark Coppejans & Donna Gilleskie & Holger Sieg & Koleman Strumpf, 2006. "Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes," NBER Working Papers 12156, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12156
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    5. Chen, Yu-Fu & Petrie, Dennis, 2012. "When to Quit Under Uncertainty? A real options approach to smoking cessation," SIRE Discussion Papers 2012-79, Scottish Institute for Research in Economics (SIRE).
    6. Ciliberto Federico & Kuminoff Nicolai V, 2010. "Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-46, July.
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    9. Rebecca K Scott, 2014. "Tax Salience vs. Price Uncertainty: Disentangling the Effects of Attention and Rational Habits," Economics Series Working Papers 736, University of Oxford, Department of Economics.
    10. Hong Liu & John A. Rizzo & Qi Sun & Fang Wu, 2015. "How Do Smokers Respond to Cigarette Taxes? Evidence from China's Cigarette Industry," Health Economics, John Wiley & Sons, Ltd., vol. 24(10), pages 1314-1330, October.
    11. Valentina Raimondi & Margherita Scoppola & Alessandro Olper, 2012. "Preference erosion and the developing countries exports to the EU: a dynamic panel gravity approach," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(4), pages 707-732, December.
    12. Scott, K. Rebecca, 2011. "Demand and price volatility: rational habits in international gasoline demand," CUDARE Working Papers 121931, University of California, Berkeley, Department of Agricultural and Resource Economics.
    13. Elie Appelbaum & Aman Ullah, 1997. "Estimation Of Moments And Production Decisions Under Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 631-637, November.
    14. Scott, K. Rebecca, 2015. "Demand and price uncertainty: Rational habits in international gasoline demand," Energy, Elsevier, vol. 79(C), pages 40-49.
    15. Kazunobu Hayakawa & Nuttawut LAKSANAPANYAKUL & Toshiyuki Matsuura & Taiyo Yoshimi, 2024. "Export Dynamics and Invoicing Currency," Keio-IES Discussion Paper Series 2024-005, Institute for Economics Studies, Keio University.
    16. G. Guindon, 2014. "The impact of tobacco prices on smoking onset in Vietnam: duration analyses of retrospective data," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 15(1), pages 19-39, January.
    17. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
    18. Tao Chen & Baohong Sun & Vishal Singh, 2009. "An Empirical Investigation of the Dynamic Effect of Marlboro's Permanent Pricing Shift," Marketing Science, INFORMS, vol. 28(4), pages 740-758, 07-08.
    19. K. Rebecca Scott, 2012. "Rational Habits and Uncertain Prices: Simulating Gasoline Consumption Behavior," Economics Series Working Papers 596, University of Oxford, Department of Economics.
    20. Dimitrios Christelis & Anna Sanz-de-Galdeano, 2009. "Smoking Persistence Across Countries: An Analysis Using Semi-Parametric Dynamic Panel Data Models with Selectivity," CSEF Working Papers 236, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    21. Khayyat, Nabaz T. & Heshmati, Almas, 2014. "Production Risk, Energy Use Efficiency and Productivity of Korean Industries," Working Paper Series in Economics and Institutions of Innovation 359, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    22. Cowan, Benjamin W., 2011. "Forward-thinking teens: The effects of college costs on adolescent risky behavior," Economics of Education Review, Elsevier, vol. 30(5), pages 813-825, October.
    23. Christelis, Dimitris & Sanz-de-Galdeano, Anna, 2011. "Smoking persistence across countries: A panel data analysis," Journal of Health Economics, Elsevier, vol. 30(5), pages 1077-1093.
    24. Somya Arora, 2022. "Why Are Downward-Sloping Demand Curves Unrealistic? A Critical Review of Factors Influencing Demand in More Realistic Scenario-II," Journal of Studies in Dynamics and Change (JSDC), ISSN: 2348-7038, Voices of Inclusive Change and Expressions- (VOICE) Trust, Dehradun, Uttarakhand, vol. 9(1), pages 1-11, January-M.
    25. Yu Na Lee, 2021. "Does Aversion to Price Risk Drive Migration? Evidence from Rural Ethiopia," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(4), pages 1268-1293, August.

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    JEL classification:

    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • I1 - Health, Education, and Welfare - - Health

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