Working Paper: NBER ID: w29997
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: No keywords provided
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 |
|---|---|
| generalized separability (C20) | restrictions on income or price effects (E64) |
| generalized separability (C20) | specific functional forms of demand (D11) |
| demand systems satisfying generalized separability (D10) | characterized by price, income, and common price aggregator (P22) |
| demand for each good (D10) | its own price, income, and common price aggregator (P22) |
| cross-price effects (F16) | operate through the price aggregator (D41) |
| demand is integrable and satisfies regularity conditions (R22) | can be expressed as a function of price aggregator and income (C43) |
| demand depends on utility and price aggregator (D11) | must take a specific functional form (C51) |
| demand systems (P42) | yield empirical predictions about market behavior (G17) |