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Sieve BLP: A semi-nonparametric model of demand for differentiated products

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  • Wang, Ao

Abstract

We develop a semi-nonparametric approach to identify and estimate the demand for differentiated products. The proposed method adopts a random coefficients discrete choice logit model (i.e., mixed logit model) in which the distribution of random coefficients is nonparametrically specified. Our method minimizes misspecification error in the distribution to which routinely used parametric approach is subject. In addition, it overcomes the practical challenge of dimensionality in the number of products that remains the main hurdle in the nonparametric estimation of demand functions. We propose a sieve estimation procedure (referred to as sieve BLP) that remains simple to implement. Extensive Monte Carlo simulations show its robust finite-sample performance under various data generating processes. We use the method to investigate the welfare implications of a sugar tax in the ready-to-eat cereal industry in the US. This application underscores the usefulness of sieve BLP due to its ability to allow for flexibly specified individual heterogeneity in demand, especially when the researcher aims to quantify the distributional effects of a policy change.

Suggested Citation

  • Wang, Ao, 2023. "Sieve BLP: A semi-nonparametric model of demand for differentiated products," Journal of Econometrics, Elsevier, vol. 235(2), pages 325-351.
    • Handle: RePEc:eee:econom:v:235:y:2023:i:2:p:325-351
    DOI: 10.1016/j.jeconom.2022.04.002
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    More about this item

    Keywords

    BLP; Mixed logit; Flexible heterogeneity; Sieve estimation; Sugar tax;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

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