  Berkson errors are commonplace in empirical microeconomics. In consumer
demand this form of measurement error occurs when the price an individual pays
is measured by the (weighted) average price paid by individuals in a specified
group (e.g., a county), rather than the true transaction price. We show the
importance of such measurement errors for the estimation of demand in a setting
with nonseparable unobserved heterogeneity. We develop a consistent estimator
using external information on the true distribution of prices. Examining the
demand for gasoline in the U.S., we document substantial within-market price
variability, and show that there are significant spatial differences in the
magnitude of Berkson errors across regions of the U.S. Accounting for Berkson
errors is found to be quantitatively important for estimating price effects and
for welfare calculations. Imposing the Slutsky shape constraint greatly reduces
the sensitivity to Berkson errors.
