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

Environmental challenges act as a spur to invention and innovation. R&D will continue to be important as companies and investors seek disruptive technology solutions that can change the economics of, and rewards from, new environmental products or processes. Significant private and public funds have already been established, many of which are still investing despite the current economic slowdown. The short‐term challenge is to ensure that these funds continue to flow and to sustain future growth. National and international environmental targets are likely to focus the public and investment spotlight on low carbon sector technologies and performance. At the same time, rising energy demand from developing nations and fluctuating energy prices are likely to increase the international focus on energy security and encourage continued investment in new energy technologies. . | A Dynamic Structural Model of Addiction Promotions and Permanent Price Cuts Brett R. Gordon Graduate School of Business Columbia University 3022 Broadway Uris 511 New York NY 10027 Email brg2114@ Tel 212-854-7864 Fax 212-854-7647 Baohong Sun Tepper School of Business Carnegie Mellon University 5000 Forbes Avenue Pittsburgh PA15213 Email bsun@ Tel 412-268-6903 Fax 412-268-7357 First Draft December 11 2008 Current Draft August 17 2009 Abstract Addictive goods fundamentally differ from non-addictive goods consuming more of an addictive good today reinforces the addiction and increases the likelihood of future consumption. Thus addiction creates an intertemporal link between a consumer s past and present decisions altering their incentives to purchase and to hold inventory. Despite the influence of addiction its impact on consumer purchase strategies and its implications for firms remain unclear. We construct a dynamic structural model with rational addiction and endogenous consumption to investigate how consumers respond differently to temporary versus permanent price promotions for addictive and non-addictive goods. We apply our model to unique consumer panel data on purchases of cigarettes crackers and butter. We find that addiction accumulated through past consumption affects decisions for cigarettes but not the two non-addictive categories. Ignoring addiction for cigarettes leads to biased estimates of price sensitivity inventory holding costs and stock-out costs. For cigarettes we find an interesting asymmetry the temporary consumption elasticity is smaller than the permanent consumption elasticity but the converse is true for the purchase elasticities. No such asymmetry exists for crackers or butter. We discuss additional implications for retailer and manufacturer pricing strategies. Keywords rational addiction dynamic structural model endogenous consumption price cut permanent price cut Brett Gordon is Assistant Professor of Marketing

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