Quality and Endogeneity Issues in Demand Systems: A comparative Estimation of Price and Expenditure Elasticities of the Demand for Organic and Conventional Vegetables in Germany

Abstract

This paper provides insights into the demand of German consumers for organic and conventional vegetables. The merging of two household panels allows, for the first time, the joint analysis of the markets for fresh and frozen vegetables. The underlying panel is a unique dataset covering grocery purchases of more than 13 000 households over a period of five years. The objective of the analysis is to derive demand elasticity estimates as well as to compare the results obtained from various estimation methods. Based on a two-step LA/AIDS, additional models which take account of potential price and expenditure endogeneity as well as of seasonal, regional and quality differences, are estimated. Especially product groups with a relatively small budget share exhibit significant differences in elasticity estimates. Therefore, it seems particularly important to consider the above mentioned issues when analyzing the demand for organic food. Results suggest an inelastic demand for conventional and a somewhat elastic demand for organic vegetables. If expenditures increase, consumers raise their demand for organic vegetables at a higher rate than their demand for conventional vegetables. Cross-price elasticities appear to be asymmetric. Demand for organic vegetables is more sensitive to price changes of conventional vegetables than vice versa.