Welfare Effects, Omitted Variables, and the Extent of the Market

This paper offers an economic interpretation of Kling's (1989) finding that single-price change measures of consumer surplus will provide an unbiased measure for a multiple-price change, provided the prices are perfectly correlated. The explanation lies in recognizing that correlation in this case serves to define the commodity extent-of-the-market. Using this link, the paper demonstrates how the insights involved in defining general equilibrium demand functions or equivalently residual demand models can be adapted to fit the issues raised with travel cost models in accounting for the effects of substitutes.