A Dynamic Structural Model of Addiction, Promotions, and Permanent Price Cuts

摘要: Addictive goods fundamentally differ from non-addictive goods: consuming more of an addictive good today reinforces the addiction and increases likelihood future consumption. Thus, creates intertemporal link between a consumer’s past present decisions, altering their incentives to purchase hold inventory. Despite influence addiction, its impact on consumer strategies implications for firms remain unclear. We construct dynamic structural model with rational endogenous consumption investigate how consumers respond differently temporary versus permanent price promotions goods. apply our unique panel data purchases cigarettes, crackers, butter. find that accumulated through affects decisions cigarettes but not two categories. Ignoring leads biased estimates sensitivity, inventory holding costs, stock-out costs. For we interesting asymmetry: elasticity is smaller than elasticity, converse true elasticities. No such asymmetry exists crackers or discuss additional retailer manufacturer pricing strategies.