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Perfect Price Aggregation and Empirical Demand Analysis
Ronald W. Anderson
Abstract
If preferences reflect a certain separability among commodities, the set of demand equations can be represented by a two-level demand system. This fact is used to formulate an approach to the estimation of a large set of possibly nonlinear demand equations. A new functional form is introduced which allows the two-level representation and exhibits nonlinear Engel curves. This functional form is used in an experiment which compares the proposed approach with familiar approaches which do not aggregate commodity prices consistently. The results of the experiment suggest that the proposed approach may be worthwhile even if the relative price changes reflected in the data set are small.
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