Controlling for Temporary Promotions in a Differentiated Products Model of Consumer Demand

Abstract

We approach the problem of estimating the long run response to the promotion of a storable good by incorporating dynamic elements into a static demand and supply model for use with store level data. The base demand model is a mixed logit that allows consumers to have heterogeneous preferences over observed product attributes. To this base model, we add an estimate of aggregate inventory for the good under study, and we formulate estimates of consumption shares and a consumption price index for use as the dependent variables in our demand and supply models. Incorporating inventory into this otherwise static model allows utility of consumption to respond to current consumer stockpiles, while the use of consumption shares and prices enables us to drive a wedge between inventory and consumption. Results indicate that controlling for inventories substantially reduces both the price coefficient (in absolute value) and the own- and cross-elasticities. The changes are in the range of those reported in the structural dynamics literature.

Keywords: Consumer Inventory, Mixed Logit, Differentiated Product Markets

JEL Classification: L81, C33, C35