Revealed preference analysis of characteristics models

Characteristics models have been found to be useful in many areas of economics. However, their empirical implementation tends to rely heavily on functional form assumptions. In this paper we develop a revealed preference approach to characteristics models. We derive the necessary and su¢ cient empirical conditions under which data on the market behaviour of heterogeneous, price-taking consumers are nonparametrically consistent with the consumer characteristics model. Where these conditions hold, we show how information may be recovered on individual consumer’s marginal valuations of product attributes. In some cases marginal valuations are point identi…ed and in other cases we can only recover bounds. Where the conditions fail we highlight the role which the introduction of unobserved product attributes can play in rationalising the data. We implement these ideas using consumer panel data on the Danish milk market. Key Words: Product characteristics, revealed preference. JEL Classi…cation: C43, D11. Acknowledgements: We are very grateful to Laura Anderson, Lars Nesheim, Ian Preston and participants in seminars and in the W. M. (Terence) Gorman Memorial Workshop held in London in June 2004 for their help and comments. Funding from the ESRC, grant number R000239865, and from the Danish National Research Foundation through its grant to CAM is gratefully acknowledged. Corresponence to: [email protected]