Estimating demand for competition analysis: A statistical exploration, and some possible applications

A report for Productivity Hub by NZIER, with the assistance of Cognitus Economic Insight.

This study investigates the feasibility of estimating Almost Ideal Demand System (AIDS) for selected expenditure classes using administrative data available in New Zealand and explores the applicability of AIDS model estimates for competition and wider policy analyses.

We have been able to use the data in Stats NZ’s IDI to estimate own and cross-product price elasticities for the major groups we studied, broken down by geographical area. We recommend using the AIDS modelling approach for future studies of demand. Estimates of demand elasticities can be used to inform the following issues in competition analysis:

• Whether a proposed merger is likely to cause consumer-harming price increases
• To define the relevant market for competition analysis
• Excess profitability and hence otherwise unobservable marginal production costs.