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Explorations in consumer demand

Selvanathan, Eliyathamby Antony (1987) Explorations in consumer demand. PhD thesis, Murdoch University.

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Abstract

This thesis contains four extensions of consumer demand as well as extensive applications of recent developments in the area. The first extension is a systematic analysis of the effects of advertising on consumption. This material includes both analytical results and empirical applications. The theory contains a comparative statics analysis of advertising and results on separability of the consumer’s utility function in the presence of advertising. The empirical application refers to alcohol consumption and advertising in the U.K. To the best of our knowledge, this represents the first time that advertising of any product has been analysed within a system-wide framework; it is certainly the first time alcohol advertising has been treated in this manner.

For the second extension of consumer demand, we develop the idea that it may be useful in some contexts to have demand models that are simple, yet still fairly flexible. The basic objective is to derive a demand model which is fairly robust; has a straightforward economic interpretation; and is easy to estimate. The new model we propose satisfies this objective. This model is linear in the parameters and its application is illustrated with Dutch and British data.

The third extension involves the stochastic approach to index number theory. Early work on the stochastic approach treated all prices as moving equi-proportionately without giving any consideration to systematic changes in relative prices. Recent developments have rehabilitated this approach by allowing for such changes in relative prices. These developments lead to estimators and sampling variances of the common trend in all prices and of the relative price movements. We extend these results to the prices of groups of goods and to prices within each group. We also derive new results for the bootstrap estimator when applied to stochastic index numbers.

The fourth extension deals with the introduction of simple techniques to analyse consumption data. These techniques are useful to apply before estimating demand equations to obtain a general "feel" for the data. They provide summary measures of the data and informal estimates of key demand parameters.

The applications presented in this thesis concentrate mainly on data pertaining to the consumption of beer, wine and spirits in the U.K. The estimates of the demand equations show that, within alcohol, beer is a necessity while wine and spirits are luxuries. A cross-country comparison reveals that these results for beer and spirits also hold for Australia and the U.S. All three beverages are price inelastic in the three countries. The U.K. data also reveal that beer is in a class by itself in the drinker’s utility function.

Based on an asymptotic test, the U.K. alcohol data reject the hypothesis of demand homogeneity (the absence of money illusion). On the other hand, a finite-sample test indicates that homogeneity is acceptable at the 1 percent level of significance. This finding is confirmed by the application of a Monte Carlo testing procedure. Homogeneity also holds for the other two countries. Slutsky symmetry (the symmetry of the substitution effects) is acceptable for all three countries. Using simulation experiments we find that the small-sample properties of estimators are satisfactory.

The advertising application includes an extension of Divisia index numbers. This extension involves the introduction of new Divisia indexes including the quantity-advertising correlation and advertising-price correlation. The empirical results show that advertising does not increase the total demand for alcohol. Rather, it reshuffles a fixed amount of total alcohol consumption among the three beverages.

Item Type: Thesis (PhD)
Murdoch Affiliation: School of Social Inquiry
Notes: Note to the author: If you would like to make your thesis openly available on Murdoch University Library's Research Repository, please contact: repository@murdoch.edu.au. Thank you.
Supervisor(s): Clements, K.W., Norris, Keith and Harrison, Kenneth
URI: http://researchrepository.murdoch.edu.au/id/eprint/51221
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