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Household Economies of Scale in Consumption: Theory and Evidence

Julie A. Nelson

Abstract

This study incorporates household economies of scale in consumption into a utility-theoretic model of household demands. Economies of scale are modeled as arising through (possibly congestible) household public goods, through increasing returns in household production, and/or through discounts for bulk purchases. The effects of economies of scale are isolated from other influences on demands by the assumption that individuals are identical and are symmetrically treated within households. Economies of scale parameters for five goods are estimated using a theoretically plausible demand system specification and data from the U.S. Consumer Expenditure Survey on expenditures by all-adult households. Results suggest the existence of significant economies of scale in the consumption of all of the included goods (food, shelter, clothing, household furnishings and operations, and transportation), with economies being especially pronounced in the consumption of shelter.