Price Effects on Compound Commodities

Junichi Minagawa and Thorsten Upmann

Scandinavian Journal of Economics, 2019, vol. 121, issue 2, 630-646

Abstract: We examine the effect of simultaneous price changes on the total demand for a group of goods, which we call a compound commodity. Specifically, we consider unit and proportional cost components (e.g., taxes, transportation costs) imposed on compound commodities. If the unit cost is positive, then the proportional cost raises the relative price of the more expensive good, and thus induces substitution towards the less expensive good within this group. Then, the substitution effect of the proportional cost for a compound commodity is non‐negative if and only if the compound commodity and the other goods are, on average, not strongly substitutable.

Date: 2019
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https://doi.org/10.1111/sjoe.12297

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