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Estimating Substitution Patterns and Demand Curvature in Discrete-Choice Models of Product Differentiation

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  • Verboven, Frank
  • Birchall, Cameron

Abstract

We extend BLP's aggregate discrete-choice model of product differentiation to create more flexibility in the price functional form. We apply a Box-Cox specification, which relaxes the typical unit demand assumption and creates flexibility on demand curvature. The model provides a unifying framework for mixed logit and mixed CES models. Our illustrative application to the ready-to-eat cereals market shows that the cross-sectional relation between price elasticities and average prices per product is more in line with descriptive elasticity patterns. Furthermore, it suggests lower cross-price elasticities between similarly priced products than in more restrictive specifications.

Suggested Citation

  • Verboven, Frank & Birchall, Cameron, 2022. "Estimating Substitution Patterns and Demand Curvature in Discrete-Choice Models of Product Differentiation," CEPR Discussion Papers 16981, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16981
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