A semiflexible normalized quadratic inverse demand system: an application to the price formation of fish

We propose a new inverse demand system, the normalized quadratic distance function, which is similar to the normalized quadratic expenditure function of Diewert and Wales (1988a). Aside from being able to maintain concavity in quantities globally, the resulting specification is also `flexible.' In addition, to obtain more parsimonious specifications, we apply the rank reduction procedures of Diewert and Wales (1988b) to the model's Antonelli matrix. We illustrate the techniques by estimating a system of inverse demands for bi-monthly fish landings, 1971–1991, for U.S. Great Lakes ports. To illustrate the model's usefulness, exact welfare measures associated with catch restrictions are derived. First version received: May 1999/Final version received: November 2000