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

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

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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File URL: http://fmpc.uconn.edu/publications/rr/rr66.pdf
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Paper provided by University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy in its series Food Marketing Policy Center Research Reports with number 066.

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Date of creation: 2002
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Handle: RePEc:zwi:fpcrep:066
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  1. William P. Putsis Jr. & Ronald W. Cotterill & Ravi Dhar, 1999. "Assessing the Competitive Interaction between Private Labels and National Brands," Yale School of Management Working Papers ysm131, Yale School of Management.
  2. Richard Blundell & Robin, J M, 1995. "Latent separability: grouping goods without weak separability," IFS Working Papers W95/09, Institute for Fiscal Studies.
  3. Cotterill, Ronald W. & Franklin, Andrew W. & Ma, Li Yu, 1996. "Measuring Market Power Effects in Differentiated Product Industries: An Application to the Soft Drink Industry," Research Reports 25229, University of Connecticut, Food Marketing Policy Center.
  4. Blackorby, Charles & Davidson, Russell & Schworm, William, 1991. "Implicit separability: Characterisation and implications for consumer demands," Journal of Economic Theory, Elsevier, vol. 55(2), pages 364-399, December.
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  7. Nevo, Aviv, 1998. "Measuring Market Power in the Ready-To-Eat Cereal Industry," Research Reports 25164, University of Connecticut, Food Marketing Policy Center.
  8. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Italianer, Alexander, 1985. "A small-sample correction for the likelihood ratio test," Economics Letters, Elsevier, vol. 19(4), pages 315-317.
  10. 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.
  11. Jerry Hausman & Gregory Leonard & J. Douglas Zona, 1994. "Competitive Analysis with Differentiated Products," Annals of Economics and Statistics, GENES, issue 34, pages 143-157.
  12. 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.
  13. 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.
  14. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, December.
  15. 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.
  16. 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.
  17. repec:adr:anecst:y:1994:i:34 is not listed on IDEAS
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