It is shown that potential entry leads to a marginal-revenue-below-marginal-cost rule, while the possibility of building up inventories (voluntarily!) leads to the intertemporal price discrimination rule, which provides a formal rationalization for normal costing. Equilibrium conditions for a group of firms are derived, using the intertemporal discrimination rule. These conditions can be written as linear estimating equations, with regression coefficients explicitly linked with parameters representing market structure. They imply that, in more concentrated industries, cost increases are less fully transmitted and changes in demand are more fully transmitted into prices than in less concentrated industries.

This chapter discusses demand for leisure and the transactions demand for money that is imbedded in a demand system derived from a specified utility function. The Stone–Geary utility function is dynamized by the introduction of state variables as parameters. The differential equation for money shows that it has a special feature. Short-run effects are derived using the first-order conditions together with the budget constraint and the state equations. Long-run demand equations are obtained by substituting the conditions into the first-order conditions and imposing the budget constraint. There is a real need for a theory of demand in which the word income designates what it suggests, that is, the sum of labor and nonlabor income, and in which labor income depends both on the wage rate and on the number of hours worked or not worked.

qi yj + (xjpjyj). Pi Stone, who applied this model in several papers (1954, 1964, 1965), suggested the parameters could either be given a time trend or allowed to depend on the past history of the branch of demand to which they relate. We want to explore the second suggestion and to see what happens when the y's are explained by past choices. In doing so, our approach will be close to the one followed by R. A. Pollak in (1970). Pollak redefines the y's as linear functions of consumption in the previous period, while we redefine these as linear functions of current values of state variables representing stocks of durable goods or habits. This has the advantage of bringing durable goods into the picture and in particular permits the introduction of a depreciation rate. Our approach is different from Pollak's in another respect: short-run behavior will be shown to be a partial adjustment to long-run equilibrium, thus permitting estimation of a reaction coefficient for each commodity. To a large extent, we follow the line of thought suggested by Houthakker and Taylor in the second edition of Consumer Demand in the U.S. (1970, chap. 5) in dynamizing the quadratic utl1it3 function. Improvements include the ex, ici t formulation of the partial adjustment procl. ;s implied in the maximization behavior anu specific consideration of the covariance structure of the error term.

An earlier paper by Phlips reported the results of a principal component analysis of the residual correlation matrix obtained after estimating a system of dynamic demand equations. The purpose was to verify the postulated additive nature of the utility function and to collect some information on possible substitution and complementarity relationships among the commodity groups. The residuals were obtained using the original Houthakker-Taylor (HT) 1966 estimation procedure. This procedure presents some advantages, but also some deficiencies. On the other hand, the correlations (in particular their signs) were interpreted on the basis of the Hicksian definitions of substitutability and complementarity, in terms of the signs of the substitution effects. The object of this note is to present some further results. First, it is of some interest to determine to what extent the results reported in the abovementioned article resist not unimportant changes in the estimation procedure. Secondly, the Hicksian definitions are rather deceptive: it is intuitively more appealing to work with the old (cardinal) notions of substitutability and complementarity (stated in terms of the signs of the second cross partial derivatives of the utility function). A decomposition of the (total) residual correlations into and correlations, the latter corresponding to preference relations defined in cardinal terms, is presented here. This corresponds to a breakdown of the substitution effect into a general and a specific effect. The analysis of this specific effect allows us to check our previous conclusions as to the grouping of commodities for which the assumption of additive preferences is appropriate.

THE pathbreaking introduction of the linear expenditure model by Klein and Rubin (1947-1948) opened the way to an econometric implementation of the theory of the true cost-of-living index. The hypothesis of a given static utility function, however, raises doubts about its relevance to a world of changing preferences. This paper aims at developing an econometric application of the theory of the true cost-of-living index for the case of taste changes. It is our hope that we will thus contribute to the improvement of the official indices measuring the cost of living. In a static context, the relevant indifference class is mostly chosen with reference to a price income vector. (For example, prices and income may be those prevailing during the base period or those prevailing during the period of comparison.) But the indifference class can also be made subject to the choice of a commodity vector, there being a one-to-one correspondence between the two vectors. In a dynamic world with continuous and systematic taste changes, on the contrary, the two vectors will not lead to the identification of the same indifference class, as was pointed out by de Souza (1974). Furthermore, the indifference class chosen is indicated by a corresponding utility level in a static model, while the utility function is time dependent in a dynamic model. A reference year is then needed to fix the time dependent parameters of the dynamic utility function. This opens the way to using the utility level not only as an indicator representative of an indifference class but also as determining of itself a level of satisfaction in a cardinalist sense. A correspondence has then to be established between indifference curves of one map at one moment of time and those of a map at another moment (i.e., after a change in tastes). And this correspondence has to be interpreted as representing equal welfare. In this paper, we develop an algorithm for the computation of two dynamic indexes. One index implements the theory developed by Fisher and Shell (F-S for short) in their wellknown 1969 paper on taste and quality change in the pure theory of the true cost-of-living index and is called the (ordinal) F-S index. This index belongs to the class of simultaneous indices, the comparison being based on current tastes while the indifference class is chosen with reference to the base period price-income vector. The other index, called the index, belongs to the class of temporal indices. It takes the base year utility level as a reference point and determines the income that together with comparison period prices and tastes will allow the consumer to attain the base-year utility level. The base period utility level is obtained by maximizing the base period utility function subject to the base period price-income vector constraint. Before proceeding, it is worth noticing that the adjective characterizes the choice of the base-year utility level as the reference point. As a result, the cardinal index is invariant only under monotonic transformations of the utility function that are not time dependent. In particular, this index is based on the assumption that there is no change over time in the of the consumer as a pleasure machine. (This assumption corresponds to the hypothesis of the absence of neutral technical progress in the theory of production.) A change in efficiency does not affect the preference ordering nor the demand functions, but does affect the utility level and therefore the index.' Received for publication May 10, 1973. Revision accepted for publication August 1, 1974.