Dualistic Consumption Behaviour in Mainland China

Examines empirically the effects of the rationing system, open inflation and budget deficits on rural and urban consumption behaviour in mainland China. Employs a dynamic error‐correction model. Estimates the model by ordinary least squares (OLS) based on annual data for the period 1952‐1991. Employs a Chow test to test for structural changes in rural and urban consumption. The empirical results show that an income variable captures the distribution effect of rationing and has a significant impact on rural and urban consumption. Open inflation tends to underestimate inflationary pressure and has no impact on consumption in rural and urban areas, whereas per capita budget deficits show a significant influence on rural consumption. The results of the Chow test indicate that economic policies and reforms have significantly changed the structure of consumption since 1979. One such change is the shift in the relative importance of consumer durable goods in total consumption than equal to, or smaller than that under the tariff. This conclusion holds for both price‐setting and quantity‐setting duopoly with heterogeneous goods as well as quantity‐setting duopoly with homogeneous goods.