Abstract

Canonical demand studies and fiscal policy simulations rest on the assumption that consumers react symmetrically to price increases and decreases. We propose a theoretically consistent demand system which allows for asymmetric response by incorporating reference prices into both own- and cross-prices. Applying the system to a large and detailed home-scan household-level data-set with food prices and purchases from Great Britain, we show evidence on asymmetric consumer response and loss aversion, with a stronger response when prices rise above their reference level. Results are robust to changes in the price definition and model specification, and a simulation shows that ignoring asymmetry may lead to important biases.