A Flexible Demand Model for Complements Using Household Production Theory

According to household production theory, consumers buy inputs and combine them to produce final goods from which they derive utility. We use this idea to build a micro-level model for the quantity demanded by a consumer across product categories. Our model proposes an intuitive explanation for the existence of negative cross-price effects across categories and can be estimated on purchase data in the presence of corner solutions and indivisible packages. We find that, even when reusing the same functional form as some previous models of demand for substitutes, our model can accommodate very different patterns of consumer preferences from perfect complementarity to no complementarity between goods. We estimate the model on purchase data from a panel of consumers and find that it yields a better fit than a set of benchmark models. We then show how the demand system estimated can be used to increase the profitability of couponing strategies by taking into account the spillover effect of coupons on demand for complementary categories and by manufacturers to make decisions regarding the size of packages by taking into account cross-category consumption. We also use the model to simulate demand under a shift in the proportions used in joint consumption, which could be stimulated via marketing efforts.

Household Production Theory and Models

This article presents a brief review of empirical studies of food demand, especially linkages to household production theory and models. It discusses several types of microeconomic models of household decision-making and highlights their implications for empirical food demand studies. Relative to neoclassical demand functions, the models of productive household behavior that are developed in this article include the opportunity cost of time of adults, full-income budget constraint, and technical efficiency or technical change in household production as determinants of the demand for food and other inputs. The article also gives an empirical application of insights gained from household production theory for a household input demand system fitted to unique data on the US household sector over the post-Second World War period. Finally, it addresses how future food demand studies might build a stronger bridge to the models of household behavior including a production function and resource of human time of adult household members.

World War II and Female Labor Force Participation Rates

Between the years 1940 and 1947 the demand for female labor in the United States shifted rapidly. Wages for women rose swiftly during the war, then fell suddenly when industries converted to peacetime production. This paper makes use of household production theory to explore the behavior of different segments of the female labor force as they responded to the radical changes in demand brought by World War II. The analysis suggests that a crucial turning point in the efforts to hire women was reached in the second half of 1943.