Market Interrelationships and Applied Demand Analysis: Bridging the Gap Between Theory and Empirics in Commodities Markets

Description

This textbook addresses the core issues facing economists concerning price determination in commodity markets, especially food and agricultural commodities. This book hones in on the conceptual basis of the various relationships, with special emphasis on market interrelationships, both horizontally and vertically. This book covers key concepts such as consumer demand theory; quality, heterogeneous goods, and cross section demand; derived demand, marketing margins, and relationship between output and raw material prices; retail-to-farm demand linkages, imperfect competition, and short-run price determination; dynamic consumer demand; and dynamic models of the firm. What makes this textbook of particular use to students is its focus on bridging the gap between theory and empirical analysis. Going from theory to empirics requires that we have data―time series or cross section―that match the theoretical constructs. Often the data match is not perfect, either by definition or how the data are computed. In addition to problems of matching data with theoretical constructs, students and researchers need to know how to specify, estimate, and interpret results within the context of imperfect and often incomplete data. This textbook uses several data sets to illustrate how one might address problems in real-world settings. Furthermore, with exercises at the end of each chapter, students are able to test themselves on their ability to bring theory to life. Contents About the Author List of Tables 1 Introduction 1.1 Background 1.2 Organization of Chapters References 2 Consumer Demand—Theory 2.1 Introduction 2.2 Consumer’s Choice Problem 2.2.1 First-Order Conditions: Application of the Kuhn-Tucker Theorem 2.2.2 Demand Functions 2.3 Comparative Statics of Income and Price Changes 2.3.1 Fundamental Matrix Equation of Consumer Demand 2.3.2 Slutsky Substitution Matrix 2.3.3 General Restrictions of Consumer Behavior 2.4 Comparative Statics of Exogenous Preference Shift Variables 2.5 Comparative Statics with Strictly Concave Utility Function 2.6 Duality Theory: Relationships Between Marshallian, Hicksian, and Frischian Demands 2.7 Inverse Demand Functions 2.7.1 Wold-Hotelling Identity 2.7.2 Comparative Statics Problems References 3 Consumer Demand—Separability and Commodity Aggregation 3.1 Introduction 3.2 Restrictions on Price Movements 3.3 Separability Concepts 3.4 Implications of Weak Separability 3.4.1 Theorem 1: Conditional Demand Functions 3.4.2 Total Differential of First-Stage Allocation Equations 3.5 Two-Stage Budgeting 3.5.1 Theorem 2 and Consistency Requirement 3.5.2 Form of Price Indices 3.6 Implications of Strong Separability 3.6.1 General Form of Composite Demand Function 3.6.2 Unconditional Demand Elasticities 3.7 Weak Separability Alone Insufficient to Estimate Unconditional Demand Elasticities 3.8 Empirical Implications Problems References 4 Consumer Demand—Empirical Analysis I 4.1 Introduction 4.2 Brief History of Empirical Consumer Demand Models 4.2.1 Single-Equation Approach 4.2.2 Systems of Demand Functions Derived from Directly Specified Utility Function 4.2.3 Formulation of Directly Specified Demand Functions 4.2.4 Derivation of Demand Functions Using Locally Flexible Functional Forms 4.2.5 Demand Functions Derived from Globally Flexible Functional Forms 4.3 System of Demand Equations Estimation 4.4 The Rotterdam Model 4.5 The Almost Ideal Demand System 4.6 The Linear Approximate AIDS 4.7 Comparison of RM with AIDS 4.8 Alternative Differential Demand Systems 4.9 Generalization of AIDS Demand Systems Problems References 5 Consumer Demand—Empirical Analysis II 5.1 Introduction 5.2 Application to U.S. Meat Demand 5.2.1 Development of Data Set Based on USDA Disappearance Data 5.2.2 Application to Absolute Price Version of Rotterdam Model 5.2.3 Application to LA/AIDS and AIDS Models 5.2.4 Unconditional Demand Elasticities from Rotterdam Model 5.3 Imposing Negative Semi-Definiteness 5.4 Other Data Sets Problems References 6 Quality, Heterogeneous Goods, and Cross-Section Demand 6.1 Introduction 6.2 Unit Values, Prices, and Quality 6.2.1 Problem of Average Prices Varying Across Households 6.2.2 Income and Price Elasticities of Quality 6.3 Cox and Wohlgenant Approach to Modeling Unit Values 6.4 Deaton Approach to Unit Values in Estimating Demand Functions 6.5 Theil-Clement Approach to Quality Measurement 6.6 Modeling Systems of Demand Functions for Heterogeneous Goods 6.6.1 Multi-Stage Budgeting Approaches to Quality 6.6.2 Nested Logit Framework Approach to Modeling Heterogeneous Goods 6.6.3 Hedonic Metric Approach to Estimating Differentiated Demand Functions 6.7 Specifying and Estimating Systems of Demand Functions with Panel Data 6.7.1 Structure of Panel Data Models 6.7.2 Demographic Variables 6.7.3 Modeling Higher Order Engel Curves 6.8 Systems of Demand Functions with Missing Observations 6.8.1 Missing Values on Exogenous Variables 6.8.2 Missing Values on Dependent Variable 6.8.3 Tobit Model 6.8.4 An Alternative Two-Stage Approach 6.8.5 Problem of Missing Prices and Amemyia Principle 6.8.6 Stone–Lewbel Prices 6.9 An Alternative Approach Based on Pseudo-Panel Data Problems References 7 Derived Demand, Marketing Margins, and Relationship Between Output and Raw Material Prices 7.1 Introduction 7.2 Historical Approaches to Modeling Derived Demand for Raw Materials 7.2.1 Price Spread Relationships with Quantity/Price 7.2.2 Derived Demand Elasticities as Products Between Elasticities of Price Transmission and Retail Demand Elasticities 7.2.3 Derived Demand Elasticities Constrained to Be Less Than Retail Demand Elasticities 7.3 Gardner Model of Retail and Farm Price Relationships 7.3.1 Long-Run Competitive Model with Variable Proportions Production Function 7.3.2 Comparative Statics of Retail-to-Farm Price Ratio 7.3.3 Comparative Statics of Farm Value Share 7.3.4 Biased Estimates of Markup Price Equation 7.3.5 Derived Demand Elasticities not Proportional to Retail Demand Elasticities 7.4 Empirical Analysis: The Wohlgenant Model of Retail-to-Farm Price Linkages 7.4.1 Importance of Input Substitutability in Food Industry 7.4.2 No Direct Estimates of Food Consumption by Commodity 7.4.3 Reduced-Form Model of Retail and Farm Prices 7.4.4 Comparative Statics of Reduced Form 7.4.5 Relationship of Reduced Form to Structure 7.4.6 Empirical Specification 7.5 Empirical Application to US Retail-to-Farm Price Linkages of Meats 7.5.1 Data Set Consistent with Data Set for Consumer Demand for Meats 7.5.2 Weights in Retail Demand Index 7.5.3 Testing Zero Homogeneity Condition 7.5.4 Model Estimation with Symmetry Restriction 7.5.5 Model Estimation with CRTS Restriction 7.5.6 Sensitivity of Results to Specification of Retail Demand Index 7.5.7 Results for Retail-to-Farm Price Linkage Equations Appendix: Input Substitution and Output Demand Uncertainty References 8 Retail-to-Farm Demand Linkages, Imperfect Competition, and Short-Run Price Determination 8.1 Introduction 8.2 Generalized Derived Demand Relationships 8.2.1 Properties of System of Derived Demand Functions 8.2.2 Total Demand Elasticities for Retail-to-Farm Demand Linkages for Meats 8.3 Imperfect Competition and Market Intermediaries 8.3.1 Review of Different Models 8.3.2 Implications for Reduced-Form Retail and Farm Price Models 8.4 Short-Run Lags in Price Determination 8.4.1 Causes of Lags Between Retail and Farm Prices 8.4.2 Model of Short-Run Price Determination with Inventory Behavior 8.4.3 Empirical Application to the US Beef Short-Run Farm-to-Retail Price Spreads 8.4.4 Asymmetry in Price Changes Appendix: Derivation of Inventory Cost Function References 9 Dynamic Consumer Demand 9.1 Introduction 9.2 History of Empirical Models of Dynamic Consumer Demand 9.2.1 Geometric Distribution 9.2.2 Partial Adjustment Model 9.2.3 State Adjustment Model 9.3 Dynamic Models with Theoretical Foundations: Myopic Behavior 9.3.1 Dynamic Additive Quadratic Demand Model and Dynamic Linear Expenditure System 9.3.2 Dynamic Models for Estimating Disaggregated Commodities 9.4 Dynamic Models with Theoretical Foundations: Intertemporal Behavior 9.4.1 Rational Addiction Model 9.4.2 Multivariate Rational Addiction (MRA) Model 9.5 Simple Non-Additive Preferences and Other Modeling Approaches 9.5.1 SNAP Model 9.5.2 Spinnewyn Model 9.5.3 Meghir and Weber Short Memory Model 9.6 Empirical Application to Dynamic Demand for US Alcohol 9.6.1 Application of MRA Model to Alcohol Demand Appendix: Proof of Theorem 4 References 10 Dynamic Models of the Firm 10.1 Introduction 10.2 Investment Models of the Firm 10.2.1 Current-Value Hamiltonian and Necessary and Sufficient Conditions for Value Maximization 10.2.2 Solution for Optimal Capital Accumulation 10.2.3 Complete Model with Short-Run Output and Variable Factors 10.3 Morrison-Paul Imperfect Competitive Model 10.4 Multivariate Models of Investment 10.5 Dynamic Inventory Behavior 10.5.1 Linear-Quadratic Model with Rising Marginal Costs of Production and Inventories and Adjustment Costs 10.5.2 First-Order Conditions from Maximizing Expected Present Discounted Value of Net Returns 10.5.3 Solution for Optimal Inventory Holding 10.5.4 Comparative Statics of Parameter Changes 10.5.5 Expectations Formation 10.5.6 Form of the Structural Inventory Behavioral Equation 10.5.7 Relationship of Linear-Quadratic Inventory Model to Flexible Accelerator 10.5.8 Optimal Sales/Price Decisions 10.5.9 Input Decisions and Derived Demand 10.5.10 Overall Process of Market Equilibrium 10.6 Other Empirically Based Approaches to Modeling Dynamics References References Index