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Good Grapes and Bad Lobsters: Applying the Alchian and Allen Theorem


  • Cowen, Tyler
  • Tabarrok, Alexander


The authors consider the well-known theorem of A. Alchian and W. Allen (1964) that adding a per unit charge to the price of two substitute goods increases the relative consumption of the higher price good. The current literature misspecifies the conditions under which the theorem holds. When applying the theorem, the fixed cost should be applied on a per unit basis, rather than in terms of an entry fee for consumption. The authors state the necessary conditions for the theorem to hold when the consumers are shipped to the goods. Copyright 1995 by Oxford University Press.

Suggested Citation

  • Cowen, Tyler & Tabarrok, Alexander, 1995. "Good Grapes and Bad Lobsters: Applying the Alchian and Allen Theorem," Economic Inquiry, Western Economic Association International, vol. 33(2), pages 253-256, April.
  • Handle: RePEc:oup:ecinqu:v:33:y:1995:i:2:p:253-56

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    References listed on IDEAS

    1. Lang, Kevin, 1989. "Why was there mandatory retirement?," Journal of Public Economics, Elsevier, vol. 39(1), pages 127-136, June.
    2. Stiglitz, Joseph E, 1987. "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature, American Economic Association, vol. 25(1), pages 1-48, March.
    3. Dickens, William T & Lundberg, Shelly J, 1993. "Hours Restrictions and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 169-192, February.
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    5. Kahn, Shulamit & Lang, Kevin, 1991. "The Effect of Hours Constraints on Labor Supply Estimates," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 605-611, November.
    6. Levine, David I, 1991. "Just-Cause Employment Policies in the Presence of Worker Adverse Selection," Journal of Labor Economics, University of Chicago Press, vol. 9(3), pages 294-305, July.
    7. Dickens, William T, et al, 1989. "Employee Crime and the Monitoring Puzzle," Journal of Labor Economics, University of Chicago Press, vol. 7(3), pages 331-347, July.
    8. Levine, David I, 1989. "Just-Cause Employment Policies When Unemployment Is a Worker Discipline Device," American Economic Review, American Economic Association, vol. 79(4), pages 902-905, September.
    9. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    10. Joseph G. Altonji & Christina H. Paxson, 1986. "Job Characteristics and Hours of Work," NBER Working Papers 1895, National Bureau of Economic Research, Inc.
    11. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-620, September.
    12. Goldin, Claudia, 1992. "Understanding the Gender Gap: An Economic History of American Women," OUP Catalogue, Oxford University Press, number 9780195072709.
    13. George A. Akerlof & Lawrence F. Katz, 1989. "Workers' Trust Funds and the Logic of Wage Profiles," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 525-536.
    14. James B. Rebitzer & Lowell J. Taylor, 1991. "Work Incentives and the Demand for Primary and Contingent Labor," NBER Working Papers 3647, National Bureau of Economic Research, Inc.
    15. Shulamit B. Kahn & Kevin Lang, 1995. "The Causes of Hours Constraints: Evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4a), pages 914-928, November.
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    17. Altonji, Joseph G & Paxson, Christina H, 1988. "Labor Supply Preferences, Hours Constraints, and Hours-Wage Trade-Offs," Journal of Labor Economics, University of Chicago Press, vol. 6(2), pages 254-276, April.
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    Blog mentions

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    1. Sigara yasağı, uzaktaki aşıklar ve yaşlı nüfusun karbon salınımına etkisi
      by ? in N. Emrah Aydınonat (Türkçe) on 2008-02-23 18:00:00


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    Cited by:

    1. Goodhue, Rachael E. & LaFrance, Jeffrey T. & Simon, Leo K., 2009. "Wine Taxes, Production, Aging and Quality," Journal of Wine Economics, Cambridge University Press, vol. 4(01), pages 27-45, March.
    2. James, Jennifer S. & Alston, Julian M., 2002. "Taxes and quality: A market-level analysis," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 46(3), September.
    3. Todd M. Nesbit, 2005. "Excise Taxation and Product Quality: The Gasoline Market," Working Papers 05-11 Classification-, Department of Economics, West Virginia University.
    4. Junichi Minagawa & Thorsten Upmann, 2012. "The Generalized Alchian-Allen Theorem," CESifo Working Paper Series 3969, CESifo Group Munich.
    5. R. Morris Coats & Gary M. Pecquet & Leon Taylor, 2005. "The pricing of gasoline grades and the third law of demand," Microeconomics 0506006, EconWPA.
    6. Gibson, John & Kim, Bonggeun, 2015. "Hicksian separability does not hold over space: Implications for the design of household surveys and price questionnaires," Journal of Development Economics, Elsevier, vol. 114(C), pages 34-40.
    7. Minagawa, Junichi & Upmann, Thorsten, 2013. "A note on parental time allocation," Labour Economics, Elsevier, vol. 25(C), pages 153-157.
    8. 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.
    9. repec:ebl:ecbull:v:6:y:2008:i:30:p:1-12 is not listed on IDEAS
    10. Minagawa, Junichi & Upmann, Thorsten, 2013. "A conditional demand approach to the Alchian–Allen effect," Economics Letters, Elsevier, vol. 120(3), pages 546-551.
    11. Minagawa, Junichi, 2012. "On Giffen-like goods," Economics Letters, Elsevier, vol. 115(2), pages 282-285.
    12. Matthew T. Brown & Daniel A. Rascher & Chad D. McEvoy & Mark S. Nagel, 2007. "Treatment of Travel Expenses by Golf Course Patrons: Sunk or Bundled Costs and the First and Third Laws of Demand," International Journal of Sport Finance, Fitness Information Technology, vol. 2(1), pages 45-53, February.
    13. T Nesbit, 2007. "Excise Taxation and Product Quality: The Gasoline Market," Economic Issues Journal Articles, Economic Issues, vol. 12(2), pages 1-14, September.
    14. Sobel, Russell S & Garrett, Thomas A, 1997. "Taxation and Product Quality: New Evidence from Generic Cigarettes," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 880-887, August.
    15. 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.
    16. Liu, Liqun & Rettenmaier, Andrew J. & Saving, Thomas R., 2011. "How much and how often: A model of repeated consumption with endogenous consumption frequency," Economics Letters, Elsevier, vol. 110(3), pages 186-188, March.

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