Unit Value Biases in Price Elasticities of Demand for Meat in Indonesia

Abstract

Indonesia is the largest market for Australian live cattle exports so estimates of income and price elasticities of meat demand in Indonesia may help exporters to set appropriate pricing strategies and to model future demands. In contrast to developed countries, where meat demand studies often use aggregate data, Indonesian studies rely on household surveys, with unit values (ratios of expenditures to quantities) used instead of market prices. When price elasticities of demand are estimated from unit values, various quality and measurement error biases can result. These biases may cause inappropriate pricing and marketing strategies to be adopted by Australian beef and cattle producers and exporters. In this paper, data from 29,000 households on Java are used to estimate a demand system for beef, chicken and other meat groups. Java contains almost two-thirds of the Indonesian population and meat consumption is similarly concentrated there. When estimation procedures are used that correct for the biases caused by unit values, the own-price elasticities of both beef (-0.46) and chicken (-0.42) are smaller than in previous studies. This difference is consistent with the theoretical literature, which suggests that using unit values instead of prices makes own-price elasticities too large in absolute terms. The own-price elasticities for beef are much more sensitive to the choice of procedure for dealing with unit values than are the estimates for chicken. Hence, pricing strategies for beef producers that are based on estimated demand elasticities from Indonesia, may prove to be inappropriate if the wrong method for dealing with unit value biases is used.