Advances in Regulatory Economics series
Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 24: Accounting for Behavioral Biases for Non-biased Demand Estimations
333 P P1 D2 D1 0 Figure 24.1 Q2 Q1 Q Example of shift in demand due to a change in demand shifters price increases; (ii) for a given price level, a change in demand shifters causes a shift of the demand curve (see Figure 24.1). To use an example relevant to the postal sector, when broadband prices drop, the demand for letter mail would fall at any given mail price: when price is P1, the quantity demanded would fall from Q1 to Q2. In this example, the slope of the demand does not change when the curve shifts. According to traditional economic theory, therefore, the willingness to pay of individual consumers reflects their underlying rational preferences and does not depend on, or change with observed prices. This framework has particular consequences for modeling the demand by Homo economicus, not only in terms of what drives demand, but also in terms of how these drivers actually affect the quantities Homo economicus wants to buy and the value he derives from what he is buying. We discuss below how these prescriptions can be translated into empirical models of demand.6 3 EMPIRICAL TESTING BASED ON TRADITIONAL DEMAND ANALYSIS Homo Economicus and Reservation Prices The process by which rational consumers decide whether and how much to purchase of any given good is quite straightforward: they compare the market price7 to their reservation price and only buy the good if its price is lower than or equal to8 the reservation price. The modeling of...
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