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Demand Estimation With Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach

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  • Patrick Bajari
  • C. Lanier Benkard
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    Abstract

    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.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0272.

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    Date of creation: Jul 2001
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    Handle: RePEc:nbr:nberte:0272

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    7. Daniel A. Ackerberg & Marc Rysman, 2005. "Unobserved Product Differentiation in Discrete-Choice Models: Estimating Price Elasticities and Welfare Effects," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 771-788, Winter.
    8. Steven Berry & James Levinsohn & Ariel Pakes, 1998. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," NBER Working Papers 6481, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Daniel A. Ackerberg & Marc Rysman, 2005. "Unobserved Product Differentiation in Discrete-Choice Models: Estimating Price Elasticities and Welfare Effects," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 771-788, Winter.
    2. Han Hong & Matthew Shum, 2000. "A Semiparametric Estimator for Dynamic Optimization Models," Economics Working Paper Archive 461, The Johns Hopkins University,Department of Economics, revised Nov 2001.
    3. Bayer, Patrick & Keohane, Nathaniel & Timmins, Christopher, 2009. "Migration and hedonic valuation: The case of air quality," Journal of Environmental Economics and Management, Elsevier, vol. 58(1), pages 1-14, July.

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