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A conditional demand approach to the Alchian–Allen effect

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  • Minagawa, Junichi
  • Upmann, Thorsten

Abstract

We explore the Alchian–Allen effect–that is, the effect of an absolutely equal increase in the price of two goods on their demand ratio–for conditional (viz. short-run) and unconditional (viz. long-run) demand functions. We show that the Alchian–Allen effect for unconditional demand equals its conditional counterpart (where the consumption level of a third good is held constant) if the two goods feature identical substitution elasticities with the third good. Remarkably, this result holds true for both Hicksian and Marshallian demand functions.

Suggested Citation

  • Minagawa, Junichi & Upmann, Thorsten, 2013. "A conditional demand approach to the Alchian–Allen effect," Economics Letters, Elsevier, vol. 120(3), pages 546-551.
    • Handle: RePEc:eee:ecolet:v:120:y:2013:i:3:p:546-551
    DOI: 10.1016/j.econlet.2013.06.017
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    References listed on IDEAS

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    1. Minagawa, Junichi, 2012. "On Giffen-like goods," Economics Letters, Elsevier, vol. 115(2), pages 282-285.
    2. Gould, John P & Segall, Joel, 1969. "The Substitution Effects of Transportation Costs," Journal of Political Economy, University of Chicago Press, vol. 77(1), pages 130-137, Jan./Feb..
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    7. Liu, Liqun, 2011. "The Alchian-Allen theorem and the law of relative demand: The case of multiple quality-differentiable brands," Mathematical Social Sciences, Elsevier, vol. 61(1), pages 52-57, January.
    8. Tetsuya Saito, 2008. "An Expository Note on Alchian-Allen Theorem When Sub-Utility Functions are Homogeneous of Degree n > 0 with Two-Stage Budgeting," Economics Bulletin, AccessEcon, vol. 6(30), pages 1-12.
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    11. Junichi Minagawa & Thorsten Upmann, 2012. "The Generalized Alchian-Allen Theorem," CESifo Working Paper Series 3969, CESifo.
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    Cited by:

    1. Junichi Minagawa & Thorsten Upmann, 2016. "Optimal Taxation under a Consumption Target," CESifo Working Paper Series 6067, CESifo.

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    More about this item

    Keywords

    Alchian–Allen theorem; Conditional and unconditional demand functions; Compensated and uncompensated price elasticities;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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