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Revealed preference analysis of characteristics models

Author

Listed:
  • Laura Blow

    (Institute for Fiscal Studies)

  • Martin Browning

    (CAM, University of Copenhagen)

  • Ian Crawford

    (University of Surrey and cemmap, Institute for Fiscal Studies)

Abstract

Characteristics models have been found to be useful in many areas of economics. However, their empirical implementation tends to rely heavily on functional form assumptions. In this paper we develop a revealed preference approach to characteristics models. We derive the necessary and sufficient empirical conditions under which data on the market behaviour of heterogeneous, price-taking consumers are nonparametrically consistent with the consumer characteristics model. Where these conditions hold, we show how information may be recovered on individual consumer’s marginal valuations of product attributes. In some cases marginal valuations are point identified and in other cases we can only recover bounds. Where the conditions fail we highlight the role which the introduction of unobserved product attributes can play in rationalising the data. We implement these ideas using consumer panel data on the Danish milk market.

Suggested Citation

  • Laura Blow & Martin Browning & Ian Crawford, 2005. "Revealed preference analysis of characteristics models," School of Economics Discussion Papers 0305, School of Economics, University of Surrey.
  • Handle: RePEc:sur:surrec:0305
    as

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    File URL: https://repec.som.surrey.ac.uk/2005/DP03-05.pdf
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    References listed on IDEAS

    as
    1. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
    2. Varian, Hal R., 1988. "Revealed preference with a subset of goods," Journal of Economic Theory, Elsevier, vol. 46(1), pages 179-185, October.
    3. Muellbauer, John, 1974. "Household Production Theory, Quality, and the "Hedonic Technique."," American Economic Review, American Economic Association, vol. 64(6), pages 977-994, December.
    4. Diewert, W. E. & Parkan, C., 1985. "Tests for the consistency of consumer data," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 127-147.
    5. Richard W. Blundell & Martin Browning & Ian A. Crawford, 2003. "Nonparametric Engel Curves and Revealed Preference," Econometrica, Econometric Society, vol. 71(1), pages 205-240, January.
    6. Richard Blundell & Jean-Marc Robin, 2000. "Latent Separability: Grouping Goods without Weak Separability," Econometrica, Econometric Society, vol. 68(1), pages 53-84, January.
    7. Browning, M J, 1983. "Necessary and Sufficient Conditions for Conditional Cost Functions," Econometrica, Econometric Society, vol. 51(3), pages 851-856, May.
    8. James Heckman & Jose Scheinkman, 1987. "The Importance of Bundling in a Gorman-Lancaster Model of Earnings," Review of Economic Studies, Oxford University Press, vol. 54(2), pages 243-255.
    9. Ian Crawford, 2004. "Necessary and sufficient conditions for latent separability," IFS Working Papers W04/17, Institute for Fiscal Studies.
    10. Bajari, Patrick & Benkard, C. Lanier, 2004. "Demand Estimation With Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," Research Papers 1842, Stanford University, Graduate School of Business.
    11. Hal R. Varian, 1983. "Non-parametric Tests of Consumer Behaviour," Review of Economic Studies, Oxford University Press, vol. 50(1), pages 99-110.
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    13. Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 256-275, March-Apr.
    14. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    15. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
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    18. W. E. Diewert, 1973. "Afriat and Revealed Preference Theory," Review of Economic Studies, Oxford University Press, vol. 40(3), pages 419-425.
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    More about this item

    Keywords

    Product characteristics; revealed preference;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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