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Price, unit value, and quality demanded

  • McKelvey, Christopher
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    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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    File URL: http://www.sciencedirect.com/science/article/B6VBV-506J0NP-1/2/cb511e2441aa9223d0f5dab4413bde37
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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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    1. Deaton, A., 1988. "Quality, Quantity, And Spatial Variation Of Price," Papers 30, World Bank - Living Standards Measurement.
    2. Gracia, A. & Albisu, L. M., 1998. "The demand for meat and fish in Spain: Urban and rural areas," Agricultural Economics, Blackwell, vol. 19(3), pages 359-366, December.
    3. 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), vol. 14(1), pages 1-20, March.
    4. John Gibson & Scott Rozelle, 2005. "Prices and Unit Values in Poverty Measurement and Tax Reform Analysis," World Bank Economic Review, World Bank Group, vol. 19(1), pages 69-97.
    5. 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..
    6. Deaton, A., 1990. "Price Elasticities From Surveys Data: Extensions And Indonesian Results," Papers 69, World Bank - Living Standards Measurement.
    7. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1975. "Transcendental Logarithmic Utility Functions," American Economic Review, American Economic Association, vol. 65(3), pages 367-83, June.
    8. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
    9. 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.
    10. 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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