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Portfolio Considerations in Differentiated Product Purchases: An Application to the Japanese Automobile Market

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  • Naoki Wakamori

Abstract

Consumers often purchase more than one differentiated product, assembling a portfolio, which might potentially affect substitution patterns of demand and, as a consequence, oligopolistic firms’ pricing strategies. This paper studies such consumers’ portfolio considerations by developing a structural model that allows for flexible complementarities/substitutabilities depending on consumer attributes and product characteristics. I estimate the model using Japanese household-level data on automobile purchasing decisions. My estimates suggest that complementarities arise when households purchase a combination of one small automobile and one minivan as their portfolio. Ignoring such effects leads to a overstated counterfactual analysis. Simulation results suggest that a policy proposal of repealing the current tax subsidies for small ecofriendly automobiles would decrease the demand for those automobiles by 9%; less than the 14% drop predicted by a standard single discrete choice model.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 11-27.

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Length: 46 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:bca:bocawp:11-27

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Keywords: Economic models; Market structure and pricing;

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  1. Chen, Jiawei & Esteban, Susanna & Shum, Matthew, 2010. "Do sales tax credits stimulate the automobile market?," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 397-402, July.
  2. West, Sarah E., 2004. "Distributional effects of alternative vehicle pollution control policies," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 735-757, March.
  3. Jerome Adda & Russell Cooper, 2000. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 778-806, August.
  4. Antonio M. Bento & Lawrence H. Goulder & Mark R. Jacobsen & Roger H. von Haefen, 2009. "Distributional and Efficiency Impacts of Increased US Gasoline Taxes," American Economic Review, American Economic Association, vol. 99(3), pages 667-99, June.
  5. Angelique Augereau & Shane Greenstein & Marc Rysman, 2006. "Coordination versus differentiation in a standards war: 56K modems," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 887-909, December.
  6. Pasquale Schiraldi, 2008. "Automobile replacement: a dynamic structural approach," LSE Research Online Documents on Economics 21780, London School of Economics and Political Science, LSE Library.
  7. Anna Alberini & Winston Harrington & Virginia McConnell, 1995. "Determinants of Participation in Accelerated Vehicle-Retirement Programs," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 93-112, Spring.
  8. Michelle Sovinsky Goeree, 2005. "Advertising in the US Personal Computer Industry," Industrial Organization 0503002, EconWPA.
  9. Robert W. Hahn, 1995. "An Economic Analysis of Scrappage," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 222-242, Summer.
  10. Austin, David & Dinan, Terry, 2005. "Clearing the air: The costs and consequences of higher CAFE standards and increased gasoline taxes," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 562-582, November.
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