Frequently Purchased Goods and Price Expectation

Abstract

I study how the price expectation regarding future prices affects consumer purchase behaviour for frequently, non-durable, goods. Using a standard dynamic model of utility maximisation, I show how current purchases depend on expectation about future prices. Then, I use scanner data to provide reduced-form evidence on which type of expectation, among those commonly used in the literature, is consistent with the data. I find that, on av- erage, consumers are weak-rational, i.e. only past prices matter to form expectations about future prices, but there is some degree of heterogeneity in price expectations.