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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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    7. 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..
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    12. 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.
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    Full references (including those not matched with items on IDEAS)

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