Some Further Discussion on the Price Index for The Almost Ideal Demand System: A Chain Price Index Approach

The issue of identification of the parameter α0 in the price index of the Almost Ideal Demand System (AIDS) is examined. In nearly all empirical studies, the model’s likelihood function has been extremely flat in α0, and this parameter has not been able to be estimated. Assumed values are often used. In this paper, an AIDS-like model is developed with an easy- to-calculate chain-price index that replaces the price index in the original AIDS. The model stands by itself with respect to consumer demand theory and flexibility. An empirical analysis of beverage demands gives merit to the specification.