Working Paper: CEPR ID: DP17249
Authors: Thibault Fally
Abstract: This paper examines demand systems where the demand for a good depends on other prices only through a common price aggregator (a scalar function of all prices). We refer to this property as ``generalized separability'' and provide the functional forms of demand that this property implies when demand is rational, i.e., derived from utility maximization. Generalized separability imposes restrictions on either income or price effects, and greater flexibility is obtained by adding indirect utility as an additional aggregator. We provide examples and applications which encompass a large variety of examples from the literature. In particular, generalized separability can be used in simple general-equilibrium models to obtain a more tractable framework and yet generate a wider range of effects of market size and productivity on firm size, entry, and prices.
Keywords: consumer demand; separability; price aggregator; integrability; rationalization; non-homothetic preferences
JEL Codes: D11; D40; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| own price (pi) (D41) | demand for a good (qi) (E41) |
| consumer income (w) (D31) | demand for a good (qi) (E41) |
| common price aggregator (P22) | demand for a good (qi) (E41) |
| changes in other prices (E39) | common price aggregator (P22) |
| demand systems (P42) | utility function (D11) |
| demand systems (P42) | quasi-concave utility function (D11) |
| sufficient conditions for integrability (C62) | elasticities of the functions (C51) |
| demand (R22) | common price aggregator (P22) |
| indirect utility (D11) | market behavior (D40) |