Dynamics of Consumer Demand for New Durable Goods

Most new consumer durable goods experience rapid declines in prices and improvements in qual- ity, suggesting the importance of modeling dynamics. This paper estimates a dynamic model of consumer preferences for new durable goods with persistent heterogeneous consumer tastes, rational expectations and repeat purchases over time. We estimate the model on the digital camcorder in- dustry using panel data on prices, sales and characteristics. We nd that standard COLIs overstate welfare gain in later periods due to a changing composition of buyers. The one-year industry elas- ticity in response to a transitory industry-wide price shock is about 25% less than the one-month elasticity.