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Estimation of price elasticities from cross-sectional data

  • Chanjin Chung

    (322 Agricultural Hall, Oklahoma State University, Stillwater, Oklahoma 74078)

  • Diansheng Dong

    (311 Warren Hall, Cornell University, Ithaca, New York 14853)

  • Todd M. Schmit

    (312 Warren Hall, Cornell University, Ithaca, New York 14853)

  • Harry M. Kaiser

    (346 Warren Hall, Cornell University, Ithaca, New York 14853)

  • Brian W. Gould

    (411 Taylor Hall, University of Wisconsin-Madison, Madison, Wisconsin 53707)

This study develops an empirical framework to estimate quality-adjusted price elasticities from cross-sectional data. The new approach shows the importance of properly adjusting for quality variation in both prices and quantities in demand analysis. When quality adjustment is concerned only with price, the unit value-based elasticity tends to overstate the true price elasticity. However, when the quality adjustment is considered with both price and quantity, the direction of bias depends on the level of the true price elasticity. If the true price elasticity is unit elastic, there would be no bias. However, the price elasticity estimated with unit values would understate a true inelastic price elasticity while it would overstate a true elastic price elasticity. [EconLit citations: D120 Q110]. © 2005 Wiley Periodicals, Inc. Agribusiness 21: 565-584, 2005.

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File URL: http://hdl.handle.net/10.1002/agr.20065
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Article provided by John Wiley & Sons, Ltd. in its journal Agribusiness.

Volume (Year): 21 (2005)
Issue (Month): 4 ()
Pages: 565-584

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Handle: RePEc:wly:agribz:v:21:y:2005:i:4:p:565-584
Contact details of provider: Web page: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1520-6297

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  1. Fred Goldman & Michael Grossman, 1979. "The Demand for Pediatric Care: An Hedonic Approach," NBER Working Papers 0134, National Bureau of Economic Research, Inc.
  2. Diansheng Dong & Brian W. Gould, 2000. "Quality versus quantity in Mexican household poultry and pork purchases," Agribusiness, John Wiley & Sons, Ltd., vol. 16(3), pages 333-355.
  3. Heien, Dale & Wessells, Cathy Roheim, 1990. "Demand Systems Estimation with Microdata: A Censored Regression Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 365-71, July.
  4. Deaton, Angus, 1988. "Quality, Quantity, and Spatial Variation of Price," American Economic Review, American Economic Association, vol. 78(3), pages 418-30, June.
  5. J. Scott Shonkwiler & Steven T. Yen, 1999. "Two-Step Estimation of a Censored System of Equations," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 972-982.
  6. Lewbel, Arthur, 1996. "Aggregation without Separability: A Generalized Composite Commodity Theorem," American Economic Review, American Economic Association, vol. 86(3), pages 524-43, June.
  7. Federico Perali & Jean-Paul Chavas, 2000. "Estimation of Censored Demand Equations from Large Cross-Section Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 1022-1037.
  8. Wales, T. J. & Woodland, A. D., 1983. "Estimation of consumer demand systems with binding non-negativity constraints," Journal of Econometrics, Elsevier, vol. 21(3), pages 263-285, April.
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