An Empirical Assessment of Endogeneity Issues in Demand Analysis for Differentiated Products
13 Pages Posted: 2 Apr 2020
Date Written: August 2003
This article explores the issue of price and expenditure endogeneity in empirical demand analysis. The analysis focuses on the U.S. carbonated soft drink market. We test the null hypothesis that price and expenditures are exogenous in the demand for carbonated soft drinks. Using an almost ideal demand system (AIDS) specification, we strongly reject exogeneity for both prices and expenditures. We find that accounting for price/expenditures endogeneity significantly impacts demand elasticity estimates. We also evaluate the implications of endogeneity issues for testing weak separability.
Keywords: almost ideal demand system, carbonated soft drinks, endogeneity, separability
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