Estimation of price elasticities from cross-sectional data

This study develops an empirical framework to estimate quality-adjusted price elasticities from cross-sectional data. The new approach shows the importance of properly adjusting for quality variation in both prices and quantities in demand analysis. When quality adjustment is concerned only with price, the unit value-based elasticity tends to overstate the true price elasticity. However, when the quality adjustment is considered with both price and quantity, the direction of bias depends on the level of the true price elasticity. If the true price elasticity is unit elastic, there would be no bias. However, the price elasticity estimated with unit values would understate a true inelastic price elasticity while it would overstate a true elastic price elasticity. [EconLit citations: D120 Q110]. © 2005 Wiley Periodicals, Inc. Agribusiness 21: 565–584, 2005.