Data Handling

Because the SUSENAS data was compiled not directly for the purposes of this study, we need first to transform the data to meet the requirement for this study. This includes issues on the grouping methods for the commodities, the issue on price of individual commodity versus price of commodity-group, and the issue on the zero expenditure phenomena.

5.1.1 Commodities Grouping

For conciseness, and moreover for estimation reasons, we need in the empirical work a small number of commodities to reduce the variables to be analyzed. Or, we need to summarize the information through a grouping of the goods, when they display a similar role in determining consumer‘s behavior. In addition, the price of close substitutes such as meat, eggs, and fish, are very likely to move together, and hence grouping them into one commodity would bring no serious problem. We need to group the goods, because there is a believe saying, that nutritional superiority of any food or group of commodities may lead consumers to make a priority of spending. Moreover, it is justified to assume, that cross price effects among highly aggregated good is vanish; so that, the grouping of commodities is justified (Theil, 1975),

Since economic theory does not provide any easy guidance on the number of composition of food groups in an empirical work, we decided to group the commodity items on an ad-hoch basis. However, the spirit of plausibility is highly respected. Accordingly, in this study we grouped the food items based on the following considerations:

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1. Nutritional content and sources. Based on this principle, food items with similar nutritional constituents or sources (e.g. carbohydrate source or cereal, animal products, etc.) were brought together into one commodity group;

2. The food price policy perspective: Food items being subject of food policy measure were considered to be one group. Special for Indonesian case, the policy makers might be interested to know the relationship between rice as a group to other food groups, especially a group of foods assumed to be its substitute, like sweet potatoes, cassava, wheat, sago and other starch containing food stuff. Because of that, these food goods are then grouped to be a single group of food. Recently, there is also an interest to know, if there is a potential for process foods (manufactured foods) to be the substitute for rice. It might be the case, that through processing, food groups previously considered to be inferior by Indonesian households have become upgraded culturally.

So that, it might become a substitute for instance, for rice. If this is the case, then food diversification strategy may be achieved by manufacturing domestically endowed food stuffs, like the ones mentioned above. To capture such information, one needs to have a clear cut guideline in distinguishing the rice to manufactured food. This reasoning is adapted into this study as strategy to compose the food group.

3. Consumption or expenditure pattern on food commodities, i.e. the substitution or complementarity of food items.

4. The form of aggregation in which the data is available.

5. Consideration of a parsimonisity: This principle seeks to include a minimum number of commodity groups with a powerful explanatory character. On this basis, thus, all non-food expenditures for example, were aggregated into a single group.

6. The past studies of the Indonesian food sector.

7. Pattern of diet of the households, the behavior of which is under investigation.

8. The need to have relatively small group of food items.

In this study, non-food goods have been excluded from the demand systems by assuming separability of the utility function. This exclusion should not be so harmful in the context of a developing country like Indonesia, where a great portion of the budget goes to food expenditure as shown by the following table. The exclusion of the durable goods group is also based on the fact, that this study used a static model. To capture preference on durable

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goods, one needs to cope with time dimension. This however, cannot be explained by a static demand system since time dimension is very crucial in the decision to spend on a durable good.

Based on these arguments it was decided to estimate a demand system for eleven commodity groups. Food is composed of eleven (11) commodities groups: consisting of rice (denoted as WR), non-rice staples (WNR), Fish (WFS), meat (WM), eggs and Milks (WE), legumes (WL), fruits (WFR), oils and fats (WOL), tobacco and betel (TBCW), prepared or manufactured food (WOPF) and spices and the miscellaneous (WSP). This method of grouping is not based on knowledge about elasticities among them as suggested by Hicks (1981), but rather based on our a priori knowledge about food needs and food habits on the areas of studies, and the reasons mentioned above.

1. The food groups covered in the study are assumed to represent total food consumption of the household. This may only be realistic assumption and therefore justified when they contributed to a major expenditure of respondent being studied.

5.1.2 Price of Commodity

Conventional practice of cross sectional demand analysis focuses its attention on behavioral change of consumers due to changing income level, household‘s demographical characteristics, and space-related demand determinants, like e.g. rural vs. urban. However, some studies have indicated, that also in cross section based analysis, estimating price elasticities is possible.

The major problem, when possibility of estimating elasticities from cross section data is proposed, concerns the degree of variation in price observed in this type of data set, and the reason why that variation exists. The question weather or if sufficient price variation exists to enable robust estimates of price elasticities to be made is actually empirical. So its justification is based on the actual conditions of the population under investigation.

In the literatures, there are arguments maintaining the existence of price variation at any point of time (cross sectional based variation): ―That there is considerable spatial variation in prices in most developing countries should not be doubted‖ (Deaton, 1987).

1. Transport difficulties make it hard to bring the price in uniformity.

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2. Price variation is there due to the fact that, as indicated by casual inspection, the price of a commodity depends on where it is purchased. Some observation revealed that the same good has different prices at different outlet in the market (Pratt et al, 1979);

3. Price variations reflect perceived or actual differences in quality, service agreements, location, or information imperfections;

4. Furthermore, price variation on commodities are caused by (i) the nature of firm‘s cost of production and weather they differ, (ii) the search strategy employed by consumers and weather search costs differ across consumers (iii) the nature of the demand for products;

Following assumptions meets the situation in East Java:

2 Price variation exists due to quality mix from one outlet to another at time of purchasing. This is still the case in East Java, both in urban and especially in rural areas: one warung¹⁵ - a most generally found outlet in East Java - may serve the buyer differently. This difference creates a buying preference among potential buyers, therefore one buyer may be loyal to one outlet, whereas the other buyers be loyal to the other outlet;

3 Price variation is a reflection of quality effects, region, price discrimination, service purchased with the commodity, seasonal effects, quality differences;

4 Price variation reflects opportunity cost of time and marginal cost/benefit of information search;

5 Price variation may still exist as a reflection of cost of information, brand loyalty, brand loyalties through distribution network.

The inclusion of price in the demand function estimation with a cross-sectional survey data of household dated back on the works of Deaton (1978, 1988) and Cox and Wohlgenant (1986). Deaton maintained that household surveys contain information on the spatial distribution of prices, while Cox and Wohlgenant hold that knowledge of all factors affecting price differences and price variation induced by region and season is desirable from the standpoint of estimating commodity curves.

In this study, we assume that structure of demand is relatively constant, and consequently price variation can attributed to changes in supply condition. It is to say that a range of

15 a traditional village-level outlet for foods and various consumer‘s goods.

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prices for similar commodities can be generated, allowing estimation of cross -sectional demand functions. Corresponding works with this assumption are those of Timmer and implicit price. It does not necessarily reflect the marginal price that consumer face, but it is the only information available from the observation indicating the price.

5.1.3 Price of Grouped Commodity

The data we have are on value and quantity of consumed food items such as quantity and value of rice of type 1, quantity and value of mutton, number and value banana etc. The households noted both these quantities and expenditures value during the survey.

Therefore, in the data we found for example, that a certain household for a certain period of time spent 20 000 Rupiah (Indonesian currency) for buying 10 kilograms of rice. Dividing the former by the latter which would be the unit value of rice could be used as an indicator that the price of rice is Rp. 2000, - per kilo. It is then straightforward to derive the own- and cross-price elasticities by running a regression of the quantity purchased on the unit value, total expenditure of food, and several other characteristics.

In this study, some of food items for reasons described in the previous section are grouped into any category. This handling creates the need of weighing price for each individual items being grouped. In this study, this is done by weighing each of them according to their share of consumption in their category. Likewise, the weighted price for each category is the sum of weighted prices of each item in that category. Hence for any particular group (k) consisting of n items, the price (P_k) is defined as

where w_I is the share in the category or group being made.

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