Working Paper No. E01-307 Sales and Consumer Inventory

Temporary price reductions (sales) are quite common for many goods and usually result in an increase in the quantity sold. We explore whether the data support the hypothesis that these increases are, at least partly, due to dynamic consumer behavior: at low prices consumers stockpile for future consumption. This effect, if present, has broad implications for interpretation of demand estimates. We construct a dynamic model of consumer choice and use it to derive testable predictions. We test the implications of the model using two years of store-level scanner data and data on the purchases of a panel of households over the same time. The results support the existence of household stockpiling behavior. __________________________ We wish to thank David Bell for the data, Iain Cockburn, Ken Hendricks, John Kennan, Ariel Pakes, Rob Porter, Joel Wladfogel and seminar participants in several seminars for comments and suggestions. The second author wishes to thank the Center for the Study of Industrial Organization at Northwestern University, for hospitality and support, and gratefully acknowledges support from the NSF (SES-0093967). This paper is available on-line at http://www.haas.berkeley.edu/groups/iber/wps/econwp.html or contact University of California Berkeley, IBER, Berkeley CA 94720-1922. 2