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Price, unit value, and quality demanded

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  • McKelvey, Christopher
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    Abstract

    Given the paucity of quality price data, it is common to rely on "unit value" (average expenditure per unit) as a proxy for price, but this is an imperfect proxy if households respond to price increases by substituting to lower quality goods. This paper draws on survey data that contain both unit value and price to estimate the severity of quality substitution in Indonesia, finding that it is prevalent. The paper next calculates price elasticities that correct for quality substitution, evaluating and ultimately rejecting a commonly used method for calculating price elasticities using only unit value data. Finally, it demonstrates that quality substitution can result in biased price elasticities even when price is perfectly observed.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Development Economics.

    Volume (Year): 95 (2011)
    Issue (Month): 2 (July)
    Pages: 157-169

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    Handle: RePEc:eee:deveco:v:95:y:2011:i:2:p:157-169

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    Web page: http://www.elsevier.com/locate/devec

    Related research

    Keywords: Prices Unit values Consumer demand Price elasticities Quality;

    References

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    1. Angus Deaton & Jed Friedman & Vivi Alatas, 2004. "Purchasing power parity exchange rates from household survey data: India and Indonesia," Working Papers 173, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
    2. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1975. "Transcendental Logarithmic Utility Functions," American Economic Review, American Economic Association, American Economic Association, vol. 65(3), pages 367-83, June.
    3. Deaton, A., 1990. "Price Elasticities From Surveys Data: Extensions And Indonesian Results," Papers, World Bank - Living Standards Measurement 69, World Bank - Living Standards Measurement.
    4. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, American Economic Association, vol. 70(3), pages 312-26, June.
    5. Deaton, A., 1988. "Quality, Quantity, And Spatial Variation Of Price," Papers, World Bank - Living Standards Measurement 30, World Bank - Living Standards Measurement.
    6. Abbi Mamo Kedir, 2005. "Estimation of Own- and Cross-price Elasticities using Unit Values: Econometric Issues and Evidence from Urban Ethiopia," Journal of African Economies, Centre for the Study of African Economies (CSAE), Centre for the Study of African Economies (CSAE), vol. 14(1), pages 1-20, March.
    7. John Gibson & Scott Rozelle, 2005. "Prices and Unit Values in Poverty Measurement and Tax Reform Analysis," World Bank Economic Review, World Bank Group, World Bank Group, vol. 19(1), pages 69-97.
    8. Nelson, Julie A, 1990. "Quantity Aggregation in Consumer Demand Analysis When Physical Quantities Are Observed," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 153-56, February.
    9. Gracia, A. & Albisu, L.M., 1998. "The demand for meat and fish in Spain: Urban and rural areas," Agricultural Economics: The Journal of the International Association of Agricultural Economists, International Association of Agricultural Economists, International Association of Agricultural Economists, vol. 19(3), December.
    10. Gracia, A. & Albisu, L. M., 1998. "The demand for meat and fish in Spain: Urban and rural areas," Agricultural Economics, Blackwell, Blackwell, vol. 19(3), pages 359-366, December.
    11. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
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    Citations

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    Cited by:
    1. Gibson, John & Kim, Bonggeun, 2013. "Do the urban poor face higher food prices? Evidence from Vietnam," Food Policy, Elsevier, Elsevier, vol. 41(C), pages 193-203.
    2. Ingvild Almås, 2010. "International Income Inequality: Measuring PPP Bias by Estimating Engel Curves for Food," CESifo Working Paper Series 3247, CESifo Group Munich.
    3. Ralitza Dimova & Ira N. Gang & Monnet B. P. Gbakou & Daniel Hoffman, 2012. "The impact of food and economic crises on diet and nutrition," Brooks World Poverty Institute Working Paper Series 17512, BWPI, The University of Manchester.
    4. Gibson, John & Kim, Bonggeun, 2013. "Testing Hicksian Separability Over Space," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C., Agricultural and Applied Economics Association 150387, Agricultural and Applied Economics Association.
    5. John Gibson & Bonggeun Kim, 2011. "Quality, Quantity and Nutritional Impact of Rice Price Changes in Vietnam," Working Papers in Economics, University of Waikato, Department of Economics 11/16, University of Waikato, Department of Economics.
    6. Jesse M. Cunha & Giacomo De Giorgi & Seema Jayachandran, 2011. "The Price Effects of Cash Versus In-Kind Transfers," NBER Working Papers 17456, National Bureau of Economic Research, Inc.
    7. Silva, Andres & Etilé, Fabrice & Jamet, Gaelle, 2013. "Consequences of the Five-a-Day Campaign: Evidence from French Panel Data," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C., Agricultural and Applied Economics Association 150426, Agricultural and Applied Economics Association.
    8. Attanasio, Orazio & Di Maro, Vincenzo & Lechene, Valérie & Phillips, David, 2013. "Welfare consequences of food prices increases: Evidence from rural Mexico," Journal of Development Economics, Elsevier, Elsevier, vol. 104(C), pages 136-151.
    9. Konstantin M. Wacker, 2011. "Do multinationals beat down developing countries' export prices? The impact of FDI on net barter terms of trade," Ibero America Institute for Econ. Research (IAI) Discussion Papers 211, Ibero-America Institute for Economic Research.
    10. Dimova, Ralitza & Gbakou, Monnet, 2013. "The Global Food Crisis: Disaster, Opportunity or Non-event? Household Level Evidence from Côte d’Ivoire," World Development, Elsevier, Elsevier, vol. 46(C), pages 185-196.
    11. Silva, Andres & Etilé, Fabrice & Boizot-Szantai, Christine & Dharmasena, Senarath, 2013. "The Impact of Beverage Taxes on Quantity and Quality of Consumption in France," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C., Agricultural and Applied Economics Association 150428, Agricultural and Applied Economics Association.
    12. Amita Majumder & Ranjan Ray & Kompal Sinha, 2012. "Spatial Comparisons of Prices and Expenditure in a Heterogeneous Country: Methodology with Application to India," Development Research Unit Working Paper Series, Monash University, Department of Economics 19-12, Monash University, Department of Economics.

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