A Generalized Dynamic Inverse AIDS Model for Fresh Fruits and Vegetables: An Application to the U.S. Bell Pepper Industry

Abstract

A novel approach is developed to evaluate the effect of changes in consumption habits on the price flexibilities of fresh fruits and vegetables. Thus, the traditional Inverse AIDS model is augmented with own- and cross-consumption habits. Results of the dynamic AIDS models suggest that habit formation plays a vital role in the magnitude of the own- and cross-price flexibilities. The D-IAIDS model with unrestricted own- and cross-habit formation outperformed the static version and the dynamic model developed by Holt and Goodwin (1997). Similarly, it generated, generally, smaller (bigger) own (cross) price flexibilities than the static and H&G version. For the bell pepper industry, results indicate that the U.S. consumers substitute more easily the locally produced bell pepper with imported bell pepper than the other way around. The local bell pepper is nearly two times more substitutable by imports from the ROW than by imports from Mexico. Changes in the consumption habits of bell pepper, at the aggregated level, make the demand for bell pepper (own-price flexibilities) more inflexible/elastic. Likewise, an increase of bell pepper consumption habits, at the aggregate level, increase the substitution possibilities among sources. As hypothesized, changes on the own- and cross consumption habits affect the price flexibilities in different magnitude and direction, which means that some of the aggregated habit effects are zero because the specific habit effects canceled each other. The cross-price flexibilities are affected more by changes in the habits of buying the Mexican bell pepper than changes in the habits of buying bell pepper from other sources. For the own-price flexibilities, the greatest habit effects come from changes in own consumption habits.