Good Grapes and Bad Lobsters: Applying the Alchian and Allen Theorem

Tyler Cowen and Alexander Tabarrok ()

Economic Inquiry, 1995, vol. 33, issue 2, pages 253-56

Abstract: The authors consider the well-known theorem of A. Alchian and W. Allen (1964) that adding a per unit charge to the price of two substitute goods increases the relative consumption of the higher price good. The current literature misspecifies the conditions under which the theorem holds. When applying the theorem, the fixed cost should be applied on a per unit basis, rather than in terms of an entry fee for consumption. The authors state the necessary conditions for the theorem to hold when the consumers are shipped to the goods. Copyright 1995 by Oxford University Press.

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