On price exogeneity in complete demand systems

Complete demand systems have always been estimated under the assumption that either prices or quantities were exogenous. In this paper, we introduce some explicit price adjustment process and test the assumption of exogeneity of prices. Comparing the model with endogenous prices to the model with exogenous prices will reveal that the assumption of the exogeneity of prices is not a very dramatic one as both estimated models are very similar in many experiments with American and Canadian data. Applying a system-wide Wu-Hausman test and a likelihood ratio test, will always lead us to reject the exogeneity of prices in three-commodity models, while at the more disaggregated level, prices may often be considered as exogenous.