This paper presents a theoretically consistent and tractable two-stage decision-making model that does not rely on the restrictive assumption that group aggregator functions are homothetic. By assuming that within-group cost functions satisfy the almost ideal demand system form, the model incorporates flexible expenditure effects, yet allows within-group prices to be aggregated into two indices that fully capture movements in those prices that are relevant for determining group demands. Thus, the model provides a more flexible alternative to the standard two-stage budgeting models. An empirical application to U.S. manufacturing demands, including an energy aggregate, is provided.

This paper demonstrates that a linear logit model, with appropriate constraints, can be used to specify a system of cost share equations that satisfy neoclassical economic conditions. Unlike many other flexible functional forms, the logistic function is particularly well suited for incorporating dynamic adjustment mechanisms. The empirical results suggest that the use of static models overstates short-run own-price elasticities and understates the corresponding long-run price effects.