Estimating Demand for Differentiated Products with Continuous Choice and Variety-seeking PDF Download

Author: Robert Stanton McMillan
Publisher:
ISBN:
Category :
Languages : en
Pages : 336

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Author: Patrick Bajari
Publisher:
ISBN:
Category : Consumers' preferences
Languages : en
Pages : 80

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Book Description
We study the identification and estimation of preferences in hedonic discrete choice models of demand for differentiated products. In the hedonic discrete choice model, products are represented as a finite dimensional bundle of characteristics, and consumers maximize utility subject to a budget constraint. Our hedonic model also incorporates product characteristics that are observed by consumers but not by the economist. We demonstrate that, unlike the case where all product characteristics are observed, it is not in general possible to uniquely recover consumer preferences from data on a consumer's choices. However, we provide several sets of assumptions under which preferences can be recovered uniquely, that we think may be satisfied in many applications. Our identification and estimation strategy is a two stage approach in the spirit of Rosen (1974). In the first stage, we show under some weak conditions that price data can be used to nonparametrically recover the unobserved product characteristics and the hedonic pricing function. In the second stage, we show under some weak conditions that if the product space is continuous and the functional form of utility is known, then there exists an inversion between a consumer's choices and her preference parameters. If the product space is discrete, we propose a Gibbs sampling algorithm to simulate the population distribution of consumers' taste coefficients.

Author: Giovanni Compiani
Publisher:
ISBN:
Category :
Languages : en
Pages : 70

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I develop and apply a nonparametric approach to estimate demand in differentiated products markets. Estimating demand flexibly is key to addressing many questions in economics that hinge on the shape - and notably the curvature - of market demand functions. My approach applies to standard discrete choice settings, but accommodates a broader range of consumer behaviors and preferences, including complementarities across goods, consumer inattention, and consumer loss aversion. Further, no distributional assumptions are made on the unobservables and only limited functional form restrictions are imposed. Using California grocery store data, I apply my approach to perform two counterfactual exercises: quantifying the pass-through of a tax, and assessing how much the multi-product nature of sellers contributes to markups. In both cases, I find that estimating demand flexibly has a significant impact on the results relative to a standard random coefficients discrete choice model, and I highlight how the outcomes relate to the estimated shape of the demand functions.

Author: José Luis Moraga-González
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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We propose a tractable method for estimation of a simultaneous search model for differentiated products that allows for observed and unobserved heterogeneity in both preferences and search costs. We show that for type I extreme value distributed search costs, expressions for search and purchase probabilities can be obtained in closed form. We show that our search model belongs to the generalized extreme value (GEV) class, which implies that it has a full information discrete-choice equivalent, and hence search data are necessary to distinguish between the search model and the equivalent full information model. We allow for price endogeneity when estimating the model and show how to obtain parameter estimates using a combination of aggregate market share data and individual level data on search and purchases. To deal with the dimensionality problem that typically arises in search models due to a large number of consideration sets we propose a novel Monte Carlo estimator for the search and purchase probabilities. Monte Carlo experiments highlight the importance of allowing for sufficient consumer heterogeneity when doing policy counterfactuals and show that our Monte Carlo estimator is accurate and computationally fast. Finally, a behavioral assumption on how consumers search provides a micro-foundation for consideration probabilities widely used in the literature.

Author: Aviv Nevo
Publisher:
ISBN:
Category : Demand (Economic theory)
Languages : en
Pages : 56

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Book Description
The study of differentiated-products markets is a central part of empirical industrial organization. Questions regarding market power, mergers, innovation, and valuation of new brands are addressed using cutting-edge econometric methods and relying on economic theory. Unfortunately, difficulty of use and computational costs have limited the scope of application of recent developments in one of the main methods for estimating demand for differentiated products: random coefficients discrete choice models. As our understanding of these models of demand has increased, both the difficulty and costs have been greatly reduced. This paper carefully discusses the latest innovations in these methods with the hope of (1) increasing the understanding, and therefore the trust, among researchers who never used these methods, and (2) reducing the difficulty of use, and therefore aiding in realizing the full potential of these methods.

Author: Simon P. Anderson
Publisher: MIT Press
ISBN: 9780262011280
Category : Business & Economics
Languages : en
Pages : 454

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"The discrete choice approach provides an ideal framework for describing the demands for differentiated products and can be used for studying most product differentiation models in the literature. By introducing extra dimensions of product heterogeneity, the framework also provides richer models of firm location and product selection."--BOOK JACKET.

Author:
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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Chapter 1 proposes a moment inequality approach to estimating random utility models when consumers consideration sets are unobservable to econometricians. I show that, without relying on a specific model of consideration set formation, the random utility model can be identified and estimated via a system of conditional moment inequalities derived from the utility maximization assumption. I apply the moment inequality approach to study whether attention inertia can explain some of the observed persistence in consumers brand choices, as opposed to alternative explanations in terms of preference, e.g., state-dependent utilities. The estimation results, obtained using household scanner data, show that up to twenty percent of the observed persistence, in terms of re-purchase probability, can be attributed to the fact that previous purchase of a brand increases its present consideration probability. Chapter 2 introduces a new approach to estimating differentiated product demand system that allows for error in market shares as measures of choice probabilities. In particular, our approach allows for products with zero sales in the data, which is a frequent phenomenon that arises in product differentiated markets but lies outside the scope of existing demand estimation techniques. We use our approach to study consumer demand from scanner data using the Dominicks Finer Foods database, and find that even for the baseline logit model, demand elasticities nearly double when the full error in market shares is taken into account.

Author: Amit Gandhi
Publisher:
ISBN:
Category : Econometrics
Languages : en
Pages :

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Book Description
This is an invited chapter for the forthcoming Volume 4 of the Handbook of Industrial Organization. We present empirical models of demand and supply in differentiated products industries with an emphasis on the key ideas arising from the recent applied literature. We start with a discussion of the challenges in modeling and estimation of demand for differentiated products, and focus on discrete choice characteristics-based demand models that address these challenges while allowing enough flexibility to capture realistic substitution patterns. Our discussion emphasizes how empirical strategies can leverage different features of data depending on the sources of variation that are commonly found in applied work. Moving to the supply-side, we show how demand estimates combined with a pricing model, can be used to recover markups and marginal costs. We also show how the model of pricing can be tested. We discuss a baseline Bertrand-Nash model of competitive pricing, and expand it to cover a) coordinated pricing, b) wholesale relationships, and c) bargaining. We end the chapter with extensions of the demand model, including dynamic and continuous demand.

Author: Joanna Stavins
Publisher:
ISBN:
Category : Supply and demand
Languages : en
Pages : 50

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Author: John Beath
Publisher: Cambridge University Press
ISBN: 9780521335522
Category : Business & Economics
Languages : en
Pages : 220

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Book Description
There are few industries in modern market economies that do not manufacture differentiated products. This book provides a systematic explanation and analysis of the widespread prevalence of this important category of products. The authors concentrate on models in which product selection is endogenous. In the first four chapters they consider models that try to predict the level of product differentiation that would emerge in situations of market equilibrium. These market equilibria with differentiated products are characterised and then compared with social welfare optima. Particular attention is paid to the distinction between horizontal and vertical differentiation as well as to the related issues of product quality and durability. This book brings together the most important theoretical contributions to these topics in a succinct and coherent manner. One of its major strengths is the way in which it carefully sets out the basic intuition behind the formal results. It will be useful to advanced undergraduate and graduate students taking courses in industrial economics and microeconomic theory.