EXTREME WEATHER AND DEMAND: AN EMPIRICAL STUDY OF TURKISH MARKET FOR AIR CONDITIONERS

Extreme weather can impact both businesses and consumers in significant ways. Firms can be affected through changes and disruptions in production and operations but can also be affected through the demand response as consumers’ demand for various goods and services changes due to extreme weather. We investigate the interdependence between the extreme temperatures and the AC demand. Demand for ACs in Turkey is growing in the last decades due to both demographic factors and an episode of rapid increase in the GDP per capita. However, the pace of the growth is not uniform and varies due to the existence of different climatic and socioeconomic conditions across different regions of Turkey. To reckon with time and cross-sectional variation as well as the city level climatic and socioeconomic differences, we estimate a dynamic fixed effect (DFE) model and use cointegration framework to identify short and long run effects of the extreme weather on the AC demand. We find strong evidence of a long run equilibrium effect where the consumer demand for ACs increases significantly due to extreme hot weather.