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Rational Addiction with an Optimal Inventory: Theory and Evidence from Japanese Daily and Monthly Purchases

In: Consumer Casualties

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  • Junmin Wan

Abstract

There are two main issues when estimating demand or supply equations. One is that the price becomes endogenous because demand and supply are determined simultaneously. Therefore, it is very difficult to estimate the demand or supply equation using aggregate data. A natural experiment constitutes a good approach for solving this problem. For example, Angrist et al. (2000) use typhoons as an instrument for price in estimating fish demand. The second issue is that the price becomes endogenous because some unobserved factors become omitted variables in the error term and correlate with the price. For example, rational consumer behavior, like hoarding when faced with a price increase, is correlated with price.

Suggested Citation

  • Junmin Wan, 2014. "Rational Addiction with an Optimal Inventory: Theory and Evidence from Japanese Daily and Monthly Purchases," Palgrave Macmillan Books, in: Consumer Casualties, chapter 2, pages 7-28, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-38484-3_2
    DOI: 10.1057/9781137384843_2
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