Testing the Alchian-Allen theorem for three goods using the pseudo Poisson model

We show that the Alchian-Allen theorem holds in three-good world. We empirically test the theorem by examining the relative demand for three quality-differentiated coffee varieties sold globally and confirm that a common per-unit charge increases the overall quality of coffee demanded. Our empirical specification employs the Poisson pseudo maximum likelihood method, which prevents sample selection bias when zero flows between country pairs occur and estimated parameter inconsistency when the data exhibit heteroscedasticity. This is a significant improvement compared to previous practice of using the ordinary least squares to estimate the log-log formulation, which led to both biased and inconsistent parameter estimates.