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Quality, Heterogeneous Goods, and Cross-Section Demand

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Market Interrelationships and Applied Demand Analysis

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Abstract

In recent years, attention has focused on cross-section and panel data sets that have become available to researchers for applied demand analysis. Such data sets present unique challenges to analysts as discussed in this chapter. This chapter addresses the issue of the specification of commodity demand when estimated with cross-sectional and/or panel data where the role of quality through price changes becomes an issue. The chapter also discusses how to model systems of heterogeneous demand functions, including linear utility and hedonic distance function models. Finally, panel data models for food demand systems are discussed with how to model demographic variables and higher order Engel curves. Issues of zero values and censoring, as well as missing prices, are also addressed with a focus on empirical implementation with systems of demand functions. The advantages of an alternative approach to panel data based on pseudo-panel data are discussed.

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Notes

  1. 1.

    Dong et al. (1998) show that this approach can produce inconsistent parameter estimates. The same criticism can be made of the papers by Deaton and other applications where researchers assign missing prices values based on averages or even regression imputations. While the methodology used by Cox and Wohlgenant can be challenged, one should not make too much of the empirical application of Dong et al., which is not credible because it excludes substitutes for beef. More realistic applications, with multiple commodities, lead to complications with Dong et al’s methodology. More will be said about how to model systems of equations with missing prices in Sect. 6.8.

  2. 2.

    Davis and Wohlgenant (1993), in the context of the random utility framework, apply Amemyia’s principle to demand for natural and artificial Christmas trees.

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Authors and Affiliations

  1. North Carolina State University, Raleigh, NC, USA

    Michael K. Wohlgenant

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Problems

Problems

  1. 6.1

    Using (6.10) and the formulas in (6.5) and (6.6), derive the quality relationships in (6.11). Discuss the economic significance of these relationships.

  2. 6.2

    What is the theoretical basis for Eq. (6.38)? What underlying assumptions of the model restrict its applications? Why will OLS produce inconsistent parameter estimates and what types of instruments would produce consistent estimate?

  3. 6.3

    Show how individual heterogeneity in (6.40) through the term \(\delta_{j}\) can be eliminated through either first-demeaning all the variables (i.e., subtracting the mean form of Eq. [6.40] from Eq. [6.40]) or through first-differencing by commodity and by household. Why would neither one of these methods be expected to work if the model is a censored demand equation like Eq. (6.43)?

  4. 6.4

    Derive the relationship between reduced form and structural parameters, (6.49), used to estimate the structural parameters via the Amemyia principle. How does the Amemyia principle differ from the two-step procedure discussed by Wooldridge (2010)?

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Wohlgenant, M.K. (2021). Quality, Heterogeneous Goods, and Cross-Section Demand. In: Market Interrelationships and Applied Demand Analysis. Palgrave Studies in Agricultural Economics and Food Policy(). Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-73144-1_6

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  • DOI: https://doi.org/10.1007/978-3-030-73144-1_6

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