RECENT years have seen considerable progress toward an integration of the theory of consumer's choice with empirical demand analysis. Theory has been extended so as to bring dynamic adjustment and the effects of past expenditure decisions (primarily through the introduction of certain state variables) into its purview,1 while on the empirical side there now exist a number of studies whose demand functions respect to a letter the restrictions imposed by classical theory.2 Unlike the demand theorist, content to assume the existence of continuous partial derivatives through the second order and to specify the signs of first derivatives, the applied analyst must go considerably further and specify the actual analytical form of the utility function. Herein, however, lies one of the major obstacles to the continued progress in applied demand analysis, for the list of functions which are rich enough to incorporate the restrictions imposed by theory, but yet sufficiently simple to be estimated with the data and techniques at hand is not lengthy. Included in this list are: (1). The additive quadratic utility function used by Houthakker and Taylor (1970) and also by Phlips (1971); (2). The linear-expenditure system based on the Geary-Samuelson utility function employed by Stone and his associates (1954, 1965) and most recently by Phlips (1972); and (3). The Rotterdam system of demand functions developed by Barten and Theil.3 The present work was motivated initially by a desire to devise a better method of estimating the additive quadratic model (AQM) than that used by Houthakker and Taylor. In particular, H and T observed a tendency for the estimated marginal utility of income to decrease sharply at the very end of the sample period, and averred that this probably reflected a defect in the method of estimation (p. 230). However, once we began exploring this, it became clear that the defect was in the quadratic utility function itself. Accordingly, we then undertook a critical look at the appropriateness of the AQM as a tool for empirical research, and in so doing decided to do the same with the linear expenditure system (LES).

The economic effects of advertising have been a much studied and hotly debated topic for a number of years. By now, there is fairly general agreement that, inter alia, advertising is important as a barrierto-entry (see Joe Bain, William Comanor and Thomas A. Wilson, Leonard Weiss) and that advertising does succeed in shifting demand for individual products (see Neil Borden, Nicholas Kaldor, Robert Dorfman and Peter Steiner, Lester Telser (1962), Kristian Palda), but there is little agreement as to the effect of advertising on aggregate consumption. John Kenneth Galbraith would have us believe that much of consumers' spending is managed from Madison Avenue,' but such a view has still to find universal acceptance.2 What is surprising, however, is that no one who has been party to the rather spirited debate generated by the Tall Gentleman's thesis has seen fit to examine by econometric methods the proposition that advertising has an impact on the aggregate consumption function. To undertake this is the purpose of this paper. In a modest, yet not insignificant, way, we feel that we have made some progress. Based on an analysis of advertising expenditures in the aggregate, our results suggest that advertising does in fact tend to increase consumption at the expense of saving. But as to what the causal mechanism underlying this is, we unfortunately cannot say. It may be that advertising actually succeeds in altering tastes a la Galbraith, but then again it may be that advertising is simply serving to bring new goods and services to the attention of consumers. As already noted, our analysis concentrates on the effects of advertising in the aggregate, and is conducted in the framework of the state-adjustment model of Hendrik Houthakker and Lester Taylor, as applied to aggregate consumption. Following Houthakker and Taylor, two variants of the model have been employed; the first focuses on consumption, and the second on personal saving. Section I presents a brief description of the Houthakker-Taylor (H-T) model and discusses the ways that it can be extended to accommodate advertising. This section also provides a short description of the data and methods of estimation. Sections II and III are empirical, Section II being devoted to a presentation of results and Section III to their critical evaluation. The paper is then concluded with some final observations in Section IV.

The demand for two custom calling services is investigated. The services may be bought individually or in a discounted package. A micro-theory based on discrete choice model is formulated that explicitly accounts for these purchase options. The model is estimated assuming both dependence and independence of the unobservable choice-influencing variables. The estimated parameters are used to simulate the revenue impact of price and discount changes. Copyright 1993 by MIT Press.

Eric A. Monke, Lester D. Taylor, International Trade Constraints and Commodity Market Models: An Application to the Cotton Market, The Review of Economics and Statistics, Vol. 67, No. 1 (Feb., 1985), pp. 98-107

Lester D. Taylor, Thomas A. Wilson, Three-Pass Least Squares: A Method for Estimating Models with a Lagged Dependent Variable, The Review of Economics and Statistics, Vol. 46, No. 4 (Nov., 1964), pp. 329-346