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Between preferences and references: Evidence from Great Britain on asymmetric price elasticities

Author

Listed:
  • Laura Cornelsen

    (London School of Hygiene and Tropical Medicine, Fac. Public Health and Policy)

  • Mario Mazzocchi

    (University of Bologna, Dept. Statistical Sciences)

  • Richard Smith

    (London School of Hygiene and Tropical Medicine, Fac. Public Health and Policy)

Abstract

Canonical demand studies and fiscal policy simulations rest on the assumption that consumers react symmetrically to price increases and decreases. We propose a theoretically consistent demand system which allows for asymmetric response by incorporating reference prices into both own- and cross-prices. Applying the system to a large and detailed home-scan household-level data-set with food prices and purchases from Great Britain, we show evidence on asymmetric consumer response and loss aversion, with a stronger response when prices rise above their reference level. Results are robust to changes in the price definition and model speci cation, and a simulation shows that ignoring asymmetry may lead to important biases.

Suggested Citation

  • Laura Cornelsen & Mario Mazzocchi & Richard Smith, 2018. "Between preferences and references: Evidence from Great Britain on asymmetric price elasticities," Quaderni di Dipartimento 1, Department of Statistics, University of Bologna.
    • Handle: RePEc:bot:quadip:wpaper:139
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    Cited by:

    1. Francesco Cerigioni, 2021. "Dual Decision Processes: Retrieving Preferences When Some Choices Are Automatic," Journal of Political Economy, University of Chicago Press, vol. 129(6), pages 1667-1704.
    2. Cornelsen, Laura & Mazzocchi, Mario & Smith, Richard D., 2019. "Fat tax or thin subsidy? How price increases and decreases affect the energy and nutrient content of food and beverage purchases in Great Britain," Social Science & Medicine, Elsevier, vol. 230(C), pages 318-327.
    3. Yaman, Firat & Offiaeli, Kingsley, 2022. "Is the price elasticity of demand asymmetric? Evidence from public transport demand," Journal of Economic Behavior & Organization, Elsevier, vol. 203(C), pages 318-335.
    4. Victor H. Aguiar & Roberto Serrano, 2018. "Cardinal Revealed Preference, Price-Dependent Utility, and Consistent Binary Choice," Working Papers 2018-3, Brown University, Department of Economics.

    More about this item

    Keywords

    Reference Price; Price Elasticities; Demand System; Food Prices; Loss Aversion;
    All these keywords.

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