Consumer stockpiling and demand elasticity biases: A theoretical note with applications

Abstract

Consumer stockpiling can result in biased empirical estimates of own- and cross-price elasticities of demand with significant implications for a range of policy issues. To further the theoretical understanding of such biases, I develop a simple, yet general theoretical framework. For any given demand and prices, I show both the own- and cross-price elasticities biases can be over- or underestimated depending upon a single intuitive condition. I then illustrate the importance of these insights by applying them to some example applications, including the measurement of market power and the estimated effects of tax increases on consumption.