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The Inverse Product Differentiation LogitModel

Author

Listed:
  • Mogens Fosgerauy
  • Julien Monardoz
  • André de Palma

    (Université de Cergy-Pontoise, THEMA)

Abstract

We introduce the inverse product differentiation logit (IPDL) model, a micro-founded inverse market share model for differentiated products that captures market segmentation according to one or more characteristics. The IPDL model generalizes the nested logit model to allow richer substitution patterns, including complementarity in demand, and can be estimated by linear instrumental variables regression with market-level data. Furthermore, we provide Monte Carlo experiments comparing the IPDL model to the workhorse empirical models of the literature. Lastly, we demonstrate the empirical performance of the IPDL model using a well-known dataset on the ready-to-eat cereals market.

Suggested Citation

  • Mogens Fosgerauy & Julien Monardoz & André de Palma, 2023. "The Inverse Product Differentiation LogitModel," THEMA Working Papers 2023-17, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    • Handle: RePEc:ema:worpap:2023-17
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    More about this item

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L - Industrial Organization

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