Do Consumers correctly Expect Price Reductions ? Testing Dynamic Behavior

The assumption that consumers are fully rational and hold correct expectations over prices is demanding in dynamic settings. We claim that it is testable provided that market-level data on prices and purchases are available. We find that consumers hold simple expectations on the timing of promotions for music albums: everything happens as if consumers were aware of reductions but did not revise their beliefs over time. The anticipation effect, due to strategic delaying of purchase, amounts to 17% of the decision of purchase during regular periods. These results have implications in terms of demand estimation, optimal pricing and welfare computations