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An Empirical Assessment of Endogeneity Issues In Demand Analysis for Differentiated Products

  • Dhar, Tirtha Pratim
  • Chavas, Jean-Paul
  • Gould, Brian W.

This article explores the issue of price and expenditure endogeneity in empirical demand analysis. The analysis focuses on the US carbonated soft drink market. We test the null hypothesis that price and expenditures are exogenous in the demand for carbonated soft drinks. Using an Almost Ideal Demand System (AIDS) specification, we strongly reject exogeneity for both prices and expenditures. We find that accounting for price/expenditures endogeneity significantly impacts demand elasticity estimates. We also evaluate the implications of endogeneity issues for testing weak separability.

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Paper provided by University of Connecticut, Food Marketing Policy Center in its series Research Reports with number 25227.

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Date of creation: 2002
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Handle: RePEc:ags:uconnr:25227
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  1. Nevo, Aviv, 1998. "Measuring Market Power in the Ready-To-Eat Cereal Industry," Food Marketing Policy Center Research Reports 037, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  2. Jerry Hausman & Gregory Leonard & J. Douglas Zona, 1994. "Competitive Analysis with Differentiated Products," Annals of Economics and Statistics, GENES, issue 34, pages 143-157.
  3. Moschini, GianCarlo & Moro, D. & Green, Richard D., 1994. "Maintaining and Testing Separability in Demand Systems," Staff General Research Papers Archive 11247, Iowa State University, Department of Economics.
  4. Italianer, Alexander, 1985. "A small-sample correction for the likelihood ratio test," Economics Letters, Elsevier, vol. 19(4), pages 315-317.
  5. Kadiyali, Vrinda & Vilcassim, Naufel J & Chintagunta, Pradeep K, 1996. "Empirical Analysis of Competitive Product Line Pricing Decisions: Lead, Follow, or Move Together?," The Journal of Business, University of Chicago Press, vol. 69(4), pages 459-87, October.
  6. R. Blundell & Jean-Marc Robin, 2000. "Latent separability: grouping goods without weak separability," Sciences Po publications info:hdl:2441/f0uohitsgqh, Sciences Po.
  7. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, December.
  8. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
  9. Ronald W. Cotterill & Andrew W. Franklin & Li Yu Ma, 1996. "Measuring Market Power Effects in Differentiated Product Industries: An Application to the Soft Drink Industry," Food Marketing Policy Center Research Reports 032, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  10. Blackorby, C. & Davidson, R. & Schworm, W., 1990. "Implicit Separability: Characterisation And Implications For Consumer Demands," G.R.E.Q.A.M. 90a16, Universite Aix-Marseille III.
  11. Ronald W. Cotterill & William P. Putsis Jr. & Ravi Dhar, 1999. "Assessing the Competitive Interaction Between Private Labels and National Brands," Food Marketing Policy Center Research Reports 044, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  12. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  13. S. E. Pudney, 1981. "An Empirical Method of Approximating the Separable Structure of Consumer Preferences," Review of Economic Studies, Oxford University Press, vol. 48(4), pages 561-577.
  14. Mario F. Teisl & Nancy E. Bockstael & Alan Levy, 2001. "Measuring the Welfare Effects of Nutrition Information," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(1), pages 133-149.
  15. repec:adr:anecst:y:1994:i:34 is not listed on IDEAS
  16. Jeffrey T. LaFrance, 1993. "Weak Separability in Applied Welfare Analysis," Monash Economics Working Papers archive-26, Monash University, Department of Economics.
  17. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
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