Quality, Quantity and Spatial Variation of Price: Back to the Bog

Demand studies increasingly use household survey data on budget shares, which vary with quantity, price, and quality. If quality response to price is ignored, estimated price elasticities of quantity demand will conflate responses on the quantity and quality margins. Deaton (1988) developed a method of estimating price elasticities from survey data, using separability restrictions to derive the quality responses to price changes. We use unique survey data with prices and qualities observed over space to test these separability restrictions, which are overwhelmingly rejected. Many reported price elasticities of quantity demand will greatly exaggerate quantity responses to price changes.