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Price, unit value, and quality demanded

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  • McKelvey, Christopher

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.

Suggested Citation

  • McKelvey, Christopher, 2011. "Price, unit value, and quality demanded," Journal of Development Economics, Elsevier, vol. 95(2), pages 157-169, July.
  • Handle: RePEc:eee:deveco:v:95:y:2011:i:2:p:157-169
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    References listed on IDEAS

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    1. Deaton, Angus, 1990. "Price elasticities from survey data : Extensions and Indonesian results," Journal of Econometrics, Elsevier, vol. 44(3), pages 281-309, June.
    2. 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.
    3. Deaton, Angus, 1988. "Quality, Quantity, and Spatial Variation of Price," American Economic Review, American Economic Association, vol. 78(3), pages 418-430, June.
    4. 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 153-156, February.
    5. 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.
    6. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1975. "Transcendental Logarithmic Utility Functions," American Economic Review, American Economic Association, vol. 65(3), pages 367-383, June.
    7. repec:pri:rpdevs:deaton_pppp_version_aug_06 is not listed on IDEAS
    8. 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.
    9. Gracia, A. & Albisu, Luis Miguel, 1998. "The demand for meat and fish in Spain: Urban and rural areas," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 19(3), December.
    10. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
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