The Neoclassical Model of Consumer Demand with Identically Priced Commodities: An Application to Time-of-Use Electricity Pricing

Douglas W. Caves, Laurits R. Christensen and Joseph Herriges

RAND Journal of Economics, 1987, vol. 18, issue 4, 564-580

Abstract: Hick's theorem permits aggregation of commodities when their relative prices are fixed, but, contrary to a widely expressed view, it does not require that they be aggregated. Even where commodities have identical prices, all of their income elasticities and many of their price elasticities can be identified through econometric estimation. Our empirical illustration uses the generalized Leontief indirect utility function with data from the Wisconsin Residential Electricity Pricing Experiment. We model the demand for six commodities although there are only two unique prices.

Date: 1987
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