Inventories, Unobservable Heterogeneity and Long Run Price Elasticities

Studies of competition when information on actual \u85rm costs is unavailable require con-sistent estimates of long run demand price-elasticities. When consumers stockpile, traditional static discrete-choice models overestimate long-term price responses. In this paper, we develop a dynamic model of demand with inventories and estimate the structural parameters fully ac-counting for consumersunobservable heterogeneity, but without having to solve the dynamic programming. We \u85nd a signi\u85cant quantitative di¤erence between the price-elasticities yielded by the static and inventory model, pointing to the risks of making wrong policy recommendations based on short run measures.