The Way the Wind Blows: Tracing Out the Demand for Norwegian Lobster Using Instrumental Variables

Knowledge of price formation in fisheries is important in understanding effects of fisheries regulations and the support or resistance to regulations from different stakeholders. This article studies how demand can be traced out using wind speed on a fishing trip. Wind speed is strongly correlated with the quantities of Norwegian lobster (Nephrops) available on the market. Using wind variables as instrumental variables and data on daily average prices and quantities over a 20-year period, we estimate the daily aggregate demand for two varieties of Nephrops. We find that the demand for both varieties is highly responsive to price changes and that own-price elasticities using the instrumental variable estimators are two to three times higher than ordinary least squares (OLS) estimates suggest. In addition, cross-price elasticities show, in contrast to OLS results, that the two types of Nephrops are close substitutes.