Asymmetric price effects on food demand of rural households: Panel evidence from China

Abstract

This study aims at detecting asymmetric price effects on food demand for rural households and compares different specifications for including reference prices in demand models. Different from the standard demand model, asymmetric price effects on food demand imply that households react stronger to price increases than price decreases as compared with the reference price. This study tests for asymmetric price effects on food demand separately for pure consumers and farmers in rural areas for the first time. Using three waves of a rural household panel survey in six poor counties of China, this study shows asymmetric price effects on demand for rice and potatoes for pure consumers, and for pork for farmers. Comparisons of different methods of specifying the reference price in demand models show that the model adding price increase and price decrease terms to the standard demand model has a coherent foundation in demand theory and incorporates both acquisition and transaction utility. Although this model had a slightly better fit to the data than the segmented price model—separating people facing price decreases from people facing price increases—it hardly showed evidence of asymmetric price effects. Asymmetric price effects were mostly found to be significant in the segmented price model. Taking into account asymmetric price effects in food demand analysis uncovers the complexity of the mechanism of price effects on demand under different price change directions and may be helpful in estimating less biased price elasticities. Possible causes of mixed asymmetric price effects for different food items and different types of households are discussed.