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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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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. Nevo, Aviv, 1999. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Competition Policy Center, Working Paper Series qt7cm5p858, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  2. 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.
  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. Pudney, Stephen E, 1981. "An Empirical Method of Approximating the Separable Structure of Consumer Preferences," Review of Economic Studies, Wiley Blackwell, vol. 48(4), pages 561-77, October.
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  6. Jeffrey T. LaFrance, 1993. "Weak Separability in Applied Welfare Analysis," Monash Economics Working Papers archive-26, Monash University, Department of Economics.
  7. Richard Blundell & Robin, J M, 1995. "Latent separability: grouping goods without weak separability," IFS Working Papers W95/09, Institute for Fiscal Studies.
  8. 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.
  9. Cotterill, Ronald W & Putsis, William P, Jr & Dhar, Ravi, 2000. "Assessing the Competitive Interaction between Private Labels and National Brands," The Journal of Business, University of Chicago Press, vol. 73(1), pages 109-37, January.
  10. Italianer, Alexander, 1985. "A small-sample correction for the likelihood ratio test," Economics Letters, Elsevier, vol. 19(4), pages 315-317.
  11. Moschini, GianCarlo & Moro, D. & Green, Richard D., 1994. "Maintaining and Testing Separability in Demand Systems," Staff General Research Papers 11247, Iowa State University, Department of Economics.
  12. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  13. 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.
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