Dynamic Consumer Demand

In this chapter, alternative dynamic models of consumer behavior are presented and evaluated. I first review historical models, including the partial adjustment model and state adjustment model, which are mainly empirical in nature. Next, models based on the theory of the consumer are presented. These modeling approaches are both myopic models (i.e., models that ignore consumer’s choices on future marginal utility), and fully intertemporal models. The intertemporal models discussed include both single-equation models and multivariate models. The rational addiction model is an important single-equation model. Multivariate generalizations of intertemporal models include the Multivariate Rational Addiction model (MRA), the SNAP model, and Habits-as-Durables model. To show how to empirically implement the system of dynamic consumer demand functions approach, I present a data set for alcoholic beverages and estimate demand parameters for the MRA model. Results indicate close conformity with theory.

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