Recent Developments in Applied Demand Analysis

The study of consumer demand is important for a number of reasons. First, as total consumption absorbs more than 70 percent of GDP in most countries, it is the largest of the macroeconomic aggregates, thus having great significance for the state of the economy as a whole and business conditions. Second, the pattern of consumption contains a wealth of useful information regarding economic welfare and living standards. Closely allied to this is that as consumption (both current and future) is the ultimate objective of all economic activity and economic systems (mercantilists notwithstanding), in a fundamental sense consumption patterns are an objective way of measuring and assessing economic performance. Finally, an understanding of the price-responsiveness of consumption is of crucial importance for a host of microeconomic policy issues including public-utility pricing, the measurement of distortions, optimal taxation and the treatment of externalities. The analysis of consumer demand is one of the major successes of economics as it represents the near perfect marriage of theory and econometrics, a situation almost unparalleled in any other field of economics. This field has attracted a lot of attention since the introduction of the linear expenditure system and its application to British data by Stone (1954), followed by the differential demand system of Barten (1964) and Theil (1965, 1975176, 1980) and developments thereafter.

1 The Economic Theory of the Consumer.- 1.1 Introduction.- 1.2 Demand Analysis Without Utility Theory.- 1.3 The Consumer’s Maximization Problem.- 1.4 Specified Forms of the Utility Function.- 1.5 Preference Independence.- 1.6 Specifying the Form of the Indirect Utility Function.- 1.7 Specifying the Form of the Cost Function.- 1.8 Working’s Model.- 1.9 Divisia Indexes.- 1.10 Barten’s Fundamental Matrix Equation.- 1.11 Solving the Matrix Equation.- 1.12 A Differential Demand System.- 1.13 Derivations and Extensions.- 1.14 Examples of Differential Demand Equations.- 1.15 The Rotterdam Model.- 1.16 Simpler Demand Systems.- 1.17 An Even Simpler Demand System.- 1.18 Working’s Model Further Considered.- 1.19 The Behaviour of Implied Income Elasticities.- 1.20 More on Substitutes and Complements.- 1.21 Preference Independence and Block Independence.- 1.22 The Demand for Groups of Goods Under Block Independence.- 1.23 Conditional Demand Equations.- 1.24 Derivations of Conditional Demand Equations.- 1.25 The Conditional Version of the Rotterdam Model.- References.- 2 Empirical Regularities in Consumption Patterns.- 2.1 Introduction.- 2.2 OECD Consumption.- 2.3 Divisia Variances.- 2.4 Engel’s Law.- 2.5 Homogeneity and Symmetry.- 2.6 The Validity of Preference Independence.- 2.7 Are Tastes Constant?.- 2.8 The Frisch Conjecture.- 2.9 Some Further International Consumption Data.- 2.10 The Linear Expenditure System.- 2.11 More on Working’s Model.- 2.12 A World Demand System.- References.- 3 Data-Analytic Techniques for Consumer Economics.- 3.1 Introduction.- 3.2 The Basic Data.- 3.3 Divisia Indexes.- 3.4 Scatter Plots.- 3.5 Further Estimates of the Income Flexibility.- 3.6 Derivations.- 3.7 Comments on Assumptions.- References.- 4 Hypothesis Testing in Demand Analysis.- 4.1 Introduction.- 4.2 The Demand Model.- 4.3 Homogeneity.- 4.4 Symmetry.- 4.5 Monte Carlo Testing.- 4.6 Homogeneity Revisited.- 4.7 Symmetry Revisited.- 4.8 Preference Independence Revisited.- 4.9 Specifying the Covariance Matrix.- 4.10 The Implied Demand Elasticities.- 4.11 More on the Elasticities.- 4.12 Conclusion.- Appendices to Chapter 4.- A4.1 Estimation Under Preference Independence with the Usual Covariance Matrix.- A4.2 Estimation Under Preference Independence with the Alternative Covariance Matrix.- References.- 5 Undersized Samples and Demand Analysis.- 5.1 Introduction.- 5.2 Working’s Model.- 5.3 Estimation Procedures.- 5.4 Alternative Covariance Matrices.- 5.5 A Simulation Experiment.- 5.6 More Simulations.- 5.7 Hypothesis Testing.- 5.8 Concluding Comments.- Appendices to Chapter 5.- A5.1 When is the Sample Undersized?.- A5.2 The asymptotic Standard Errors of the Slutsky Coefficients under Preference Independence.- References.- 6 The Demand for Alcoholic Beverages.- 6.1 Introduction.- 6.2 The Data.- 6.3 The Effects of Relative Prices and Income: A Preliminary Analysis.- 6.4 Testing Homogeneity and Symmetry.- 6.5 The Utility Interactions Among Beverages.- 6.6 The Second Version of the Demand Model.- 6.7 How Reliable are the ML Estimators?.- 6.8 The Goodness of Fit of the Model.- 6.9 The Demand for Alcohol as a Whole.- 6.10 On Substitutes and Complements.- 6.11 Comparison with Other Studies.- 6.12 Concluding Comments.- References.- 7 Advertising and Consumption: A Theoretical Analysis.- 7.1 Introduction.- 7.2 Advertising and Consumption.- 7.3 The Comparative Statics of Advertising.- 7.4 Two Special Cases.- 7.5 Indexes of Advertising.- 7.6 A Differential Demand System With Advertising.- 7.7 Derivations.- 7.8 Block Independence.- 7.9 A Groupwise Index of Advertising.- 7.10 The Composite Demand Equation.- 7.11 Conditional Demand Equations.- 7.12 Conditional Demand Equations in Absolute Prices.- 7.13 The Unconditional Demand Equations.- 7.14 More Derivations.- References.- 8 The Effects of Advertising on Alcohol Consumption: An Empirical Analysis.- 8.1 Introduction.- 8.2 The UK Alcohol Advertising Data.- 8.3 Divisia Indexes of Alcohol Advertising.- 8.4 The Extended Generalized Rotterdam Model.- 8.5 The Corrected Quantity-Advertising Indexes.- 8.6 Estimates of the Corrected Quantity-Advertising Correlation.- 8.7 Estimates of the Elasticity of Marginal Utility.- 8.8 Estimates of the Conditional Demand Equations.- 8.9 Advertising in Stock Form.- 8.10 Is Advertising Predetermined?.- 8.11 The Unconditional Elasticities.- 8.12 Previous Studies.- Appendix to Chapter 8.- References.- 9 Rotterdam Model in Forecasting: An Application to the Alcohol Market.- 9.1 Introduction.- 9.2 The Rotterdam Demand Model.- 9.3 Block Structure of Alcohol Market.- 9.4 The Forecasting Procedure.- 9.5 The Forecasts.- 9.6 The Bootstrap Standard Errors of the Forecasts.- 9.7 Forecasts versus Observed.- References.- 10 Aggregation and Consumer Demand.- 10.1 Introduction.- 10.2 Aggregation Over Commodities.- 10.3 The Convergence Approach to Linear Aggregation.- 10.4 Demand Equations in Absolute Prices.- 10.5 Derivations.- 10.6 The Aggregation Bias of the Slutsky Coefficients.- 10.7 Demand Equations in Relative Prices.- 10.8 Derivation of the Relative Price Version of the Macro Demand Model ...- 10.9 The Remainder Terms.- 10.10 Properties of the Macrocoefficients.- References.