DP13382 | Price Reference Effects in Consumer Demand

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We develop a structural model of demand with expectations-based reference effects following Koszegi and Rabin (2006). We apply this model to panel data on ketchup purchases and a repeated cross section on automobile purchases, finding significant reference effects in both cases. Estimated reference effects imply substantial differences between short- and long-run demand responses, with magnitudes comparable to a dynamic stockpiling model. This attractive model feature allows us to explore price policy alternatives such as high-low versus every-day-low-pricing at low computational cost. Finally, we embed the model within a fully dynamic framework additionally accommodating limited attention and forward-looking search.