Recent Developments in Applied Demand Analysis: Alcohol, Advertising and Global Consumption

417 Pages·1995·11.46 MB·English

by  E. A. Selvanathan

Recent Developments in Applied Demand Analysis
Alcohol, Advertising and Global Consumption
Springer
Berlin
Heidelberg
New York
Barcelona
Budapest
Hong Kong
London
Milan
Paris
Tokyo
E. A. Selvanathan
Kenneth W. Clements
Recent Developtnents
in Applied
Dellland Analysis
Alcohol, Advertising
and Global Consumption
With 25 Figures
, Springer
E. A. Selvanathan
School of International Business Relations
Griffith University
Nathan Queensland 4111
Australia
Kenneth W. Clements
Economic Research Centre
Department of Economics
University of Western Australia
Nedlands WA 6009
Australia
Library of Congress Cataloglng-In-Publlcatlon Data
Selvanathan. E. Antony, 1954-
Recent developments In applIed demand analysIs: alcohol,
advertisIng and global consumptIon / E. Antony Selvanathan, Kenneth
W. Clements.
p. CII.
Includes bibliographIcal references and Index.
ISBN-13:978-3-642-85207-7(Sprlnger-Verlag Berlin HeIdelberg New York
acId-free paper)
1. Alcoholic beverage Industry--Econo;etrlc models.
2. Advertlslng--Alcohollc beverages--Econolletrlc models.
3. Consullptlon (Economlcs)--Econometrlc lIodels. 4. Demand functIons
(EconomIc theory) I. Cle.ents, Kenneth W.o 1950- II. TItle.
HD9350.5.S45 1995
380.1·456631--dc20 95-30838
CIP
ISBN-13: 978-3-642-85207-7 e-ISBN-13: 978-3-642-85205-3
DOl: 10.1007/978-3-642-85205-3
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SPIN 10134109 43/1101 -5 4 3 1 1 0 - Printed on acid-free paper
Preface
The study of consumer demand is important for a number of reasons.
First, as total consumption absorbs more than 70 percent of GDP in most
countries, it is the largest of the macroeconomic aggregates, thus having
great significance for the state of the economy as a whole and business
conditions. Second, the pattern of consumption contains a wealth of
useful information regarding economic welfare and living standards.
Closely allied to this is that as consumption (both current and future) is
the ultimate objective of all economic activity and economic systems
(mercantilists notwithstanding), in a fundamental sense consumption
patterns are an objective way of measuring and assessing economic
performance. Finally, an understanding of the price-responsiveness of
consumption is of crucial importance for a host of microeconomic policy
issues including public-utility pricing, the measurement of distortions,
optimal taxation and the treatment of externalities.
The analysis of consumer demand is one of the major successes of
economics as it represents the near perfect marriage of theory and
econometrics, a situation almost unparalleled in any other field of
economics. This field has attracted a lot of attention since the
introduction of the linear expenditure system and its application to British
data by Stone (1954), followed by the differential demand system of
Barten (1964) and Theil (1965, 1975176, 1980) and developments
thereafter.
This book presents a number of recent developments in demand
analysis. These include new simple data-analytic techniques for analysing
consumption data; new tests based on computer simulations for hypothesis
VI
testing; new methodological results on how to estimate demand equations;
innovative applications to alcohol demand; extensions of the system-wide
framework to analyse the effects of advertising on consumption; novel
approaches to forecasting consumption patterns; and new theoretical
results on aggregation of demand systems over consumers. All these
innovations are extensively illustrated with the use of data from 18 OECD
countries.
The empirical results presented in the book have a number of uses.
Application of the above new developments give rise to reliable
estimates of income and price elasticities of demand for 10 commodity
groups in 18 countries, as well as for the alcoholic beverages beer, wine
and spirits in the UK and Australia. A feature of these results is that a
number of major empirical regUlarities are identified that seem to hold
across different periods and different countries. Some of these empirical
regularities include (i) a strong relationship between the income elasticity
of food and income; (ii) the similarity of tastes internationally; (iii) beer
is always a necessity and spirits a luxury; and (iv) those commodities
which are more price elastic also tend to be more luxurious and vice
versa. Given that these results seem to hold in a wide variety of
circumstances, we can have more than the usual degree of confidence in
them. It is not too much of an exaggeration to claim that our research has
uncovered a group of "natural constants" regarding consumption patterns.
In many countries, it is argued that advertising of alcohol increases
total consumption of alcoholic beverages. From the social and health
points of view there is thus strong opposition to alcohol advertising. On
the other hand, the alcohol industry argues that advertising affects only the
choice of brand or beverage, and not total consumption. Accordingly, the
industry tends to argue that advertising promotes healthy competition.
The results presented in the book regarding the effects of advertising on
alcohol consumption have immediate relevance to this important debate.
A Preview
This book emphasizes the unity between theory and applications. Thus
we often employ the approach of presenting new analytic developments
and then immediately showing their relevance through applications.
While each chapter is well integrated with the others, they are also written
in a way so as to be largely self-contained.
Chapter I lays out the analytical framework for consumer demand. It
gives a self-contained exposition of known results and some more recent
developments in the theory of consumer demand. This chapter covers
demand systems based on specific utility functions (e.g., the linear
expenditure system), demand systems based on indirect utility functions
(e.g., the translog), those based on cost functions (e.g., the almost ideal
demand system) and some others. It then introduces the differential
approach to consumption theory, some members of the class of differential
demand equations and some new simpler alternatives. This chapter also
discusses separable utility functions and demand equations for groups of
goods and for goods within a group.
Chapter 2 reviews, distills and systematises some of the major
empirical findings on consumption patterns, concentrating in particular on
the more recent evidence. This chapter analyses the consumption patterns
in OECD countries by presenting a number of Divisia index measures.
The chapter then evaluates recent evidence regarding the hypotheses of
homogeneity, symmetry and preference independence. It also discusses
the issue of constancy of tastes and aspects of functional form of demand
equations.
Chapter 3 introduces several new simple data-analytic techniques for
analysing consumption data. These techniques are useful to apply before
estimating demand equations to obtain a general 'feel' for the data. They
provide summary. measures of the data and, under certain assumptions,
yield preliminary estimates of key demand parameters. The techniques
are illustrated with data pertaining to the demand for beer, wine and
spirits in the UK.
viii
Chapter 4 shows how recent advances in the methodology of
econometric simulation can be used to test homogeneity, symmetry and
preference independence. Full technical details of these techniques are
presented and, using a database for 18 DECO countries, this chapter
probably presents one of the most extensive and intensive applications in
the area of demand analysis. The results show that, in general, consumers
satisfy the hypotheses of demand homogeneity, Slutsky symmetry and
preference independence. This evidence overturns a large body of
previous findings, much of which was based on flawed econometric
methodology. This chapter also presents reliable income and price
elasticities for 10 commodity groups in the 18 countries.
Demand analysis can be very demanding in terms of data, especially
when the number of goods is large. Thus for moderate to large demand
systems, samples are not infrequently undersized or nearly so. Chapter 5
investigates alternative ways of estimating demand systems with
undersized samples. Using another cross-country database, the chapter
analyses the performance of various specifications of the error covariance
matrix as solutions to the undersized sample problem.
Chapter 6 presents an extensive analysis of recent consumption patterns
of beer, wine and spirits for Australia. This chapter utilizes the
data-analytic techniques presented in Chapter 3, the demand equations
presented in Chapter 1 and the new econometric techniques introduced in
Chapter 4. The analysis shows that beer and wine are necessities and
spirits is a strong luxury; and beer and spirits are specific complements.
The chapter also presents a comparative analysis of Australian alcohol
consumption patterns with those in a number of other countries and
investigates to what extent tastes (with respect to alcohol) are similar
internationally.
Chapters 7 and 8 give a theoretical and empirical analysis of the effects
of advertising on consumption. Chapter 7 obtains demand equations from
the theory of the utility-maximising consumer which include advertising
variables. This chapter also analyses the intriguing link between the
effects of advertising on consumption and the conventional substitution
ix
effects. One result is that the products which are more price elastic (due
to the availability of good substitutes) will be more sensitive to
advertising, something that will be interesting to marketing analysts.
Chapter 8 examines the controversial issue of the influence of
advertising on alcohol consumption. This chapter initially extends some
of the data-analytic techniques introduced in Chapter 3 to present a
preliminary analysis of UK data on advertising and alcohol. This chapter
also presents advertising elasticities for beer, wine and spirits and tests the
effects of advertising on the consumption of the three beverages
individually and alcohol as a whole. Surprisingly, the results indicate that
advertising does not increase total consumption -- it just reshuffles it
among beer, wine and spirits. Thus, on the basis of this evidence, there is
no support for the often-heard claim that alcohol advertising should be
prohibited as it increases drinking.
Chapter 9 shows how the demand equations derived in Chapter 1 can
be used for the purposes of forecasting market shares and consumption.
This chapter also uses Efron's (1979) distribution-free bootstrap techniques
to evaluate the quality of the forecasts. The results are illustrated with an
application to UK data pertaining to beer, wine and spirits.
The Differential demand systems derived in Chapter 1 are micro in
nature as they are based on the utility-maximising behaviour of a single
consumer. Usually, since the data are available only in some aggregate
form (e.g., per capita), it is common practice to use the aggregate form in
the micro demand system for estimation. Critics argue that the theoretical
properties of the micro system do not carry over to the macro system.
Chapter 10, using the convergence approach to aggregation (Barnett,
1979a,1979b,1981; E.A. Selvanathan, 1991; and Theil, 1971,1975176),
establishes the strong result that will silence the critics: The macro
demand equations of the differential approach are completely analogous
to the micro equations and all their theoretical properties carry over.
Due to its elegance and power, we believe that this approach to
aggregation will receive more attention in the future.
x
The Uses of the Book
This book communicates in a unified fashion new results combining (i)
methodological advances in economic theory and econometrics; and (ii)
their empirical applications. Consequently, the book will be of interest to
economists who require reliable estimates of income and price elasticities
of demand for (a) broad commodity groups such as food, beverages,
clothing, housing, durables, medical care, transport, recreation, education
and miscellaneous goods in 18 OECD countries; and (b) three alcoholic
beverages, beer, wine and spirits in Australia and the UK. Analysts
(including marketing researchers) will be interested in our new approaches
to measuring the effects of advertising on consumption and to forecasting
market shares.
The recently-developed econometric techniques presented in the book
and their applications using large databases will be a major attraction to
econometricians. The material on simpler demand systems, advertising
and aggregation over consumers will be most interesting to theorists as the
results are new and sometimes intriguing. The book can also be used for
teaching purposes in microeconomics, econometrics and marketing
courses at the graduate and advanced undergraduate levels.
References
Barnett, W.A (1979a). 'Theoretical Foundations for the Rotterdam Model,'
Review of Economic Studies 46: 109-30.
Barnett, W.A (1979b). 'The Joint Allocation of Leisure and Goods
Expenditure,' Econometrica 47: 539-63.
Barnett, W.A (1981). Consumer Demand and lAbour Supply. Amsterdam:
North-Holland Publishing Company.
Barten, AP. (1964). 'Consumer Demand Functions Under Conditions of
Almost Additive Preferences,' Econometrica 32: 1-38.