DEMAND THRESHOLD, ZERO EXPENDITURE AND HIERARCHICAL MODEL OF CONSUMER DEMAND

Consumer expenditure surveys often show households reporting zero consumption of some commodities. Three reasons for this are recognized in the literature: (i) infrequency of purchase, (ii) a strong brand preference for differentiated products and (iii) misreporting. However, sometimes the number of households reporting zero consumption is seen to decline with income. To capture this phenomenon, which does not fall into any of the categories mentioned above, we propose a hierarchical preference structure and identify a class of recursive utility functions representing this structure. An empirical illustration based on Indian consumer expenditure data is provided. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd.