The Revealed Preference Approach to Demand

The standard approach to measuring demand responses and consumer preferences assumes particular parametric models for the consumer preferences and demand func-tions, and subsequently \u85ts these models to observed data. In principle, the estimated demand models can then be used (i) to test consistency of the data with the theory of consumer behavior, (ii) to infer consumer preferences, and (iii) to predict the consumers response to, say, new prices following a policy reform. This chapter focuses on an al-ternative, nonparametric approach. More speci\u85cally, we review methods that tackle the above issues by merely starting from a minimal set of so-called revealed preference axioms. In contrast to the standard approach, this revealed preference approach avoids the use of parametric models for preferences or demand. The structure of the chapter is as follows. First, we introduce the basic concepts of the revealed preference approach to modeling consumer demand. Next, we consider issues like goodness-of-\u85t, power and measurement error, which are important in the context of empirical applications. Fi-nally, we review a number of interesting extensions of the revealed preference approach, which deal with characteristics models, habit formation and the collective model