Revealing Unobserved Price Discounts

Abstract

Price data is subject to measurement error due to temporary promotions, coupon usage by consumers or bargaining between consumers and sellers. Even when detailed data on transaction prices are available, prices of not purchased alternatives may not be recorded by the dataset, making counterfactual analysis difficult. In this paper, we study consumer behavior when the transaction prices are subject to such variations that are not captured by the data. We show that the weak axiom of revealed preference may lead to erroneous conclusions about violations of utility maximization and incorrectly measure consumer preferences if unobserved price variations are ignored.