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Connected Substitutes and Invertibility of Demand

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  • Steven T. Berry
  • Amit Gandhi
  • Philip Haile

Abstract

We consider the invertibility of a nonparametric nonseparable demand system. Invertibility of demand is important in several contexts, including identification of demand, estimation of demand, testing of revealed preference, and economic theory requiring uniqueness of market clearing prices. We introduce the notion of "connected substitutes" and show that this structure is sufficient for invertibility. The connected substitutes conditions require weak substitution between all goods and sufficient strict substitution to necessitate treating them in a single demand system. These conditions are satisfied in many standard models, have transparent economic interpretation, and allow us to show invertibility without functional form restrictions, smoothness assumptions, or strong domain restrictions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17193.

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Date of creation: Jul 2011
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Publication status: published as Steven Berry, Amit Gandhi and Philip Haile (2013), \Connected Substitutes and Invertibility of Demand," Econometrica v. 81(5) (September), pp. 2087-2111 (also Cowles Foundation Discussion Paper # 1806R.)
Handle: RePEc:nbr:nberwo:17193

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  1. Nevo, Aviv, 1999. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Competition Policy Center, Working Paper Series qt7cm5p858, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
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  5. Raymond Deneckere & Michael Rothschild, 1986. "Monopolistic Competition and Preference Diversity," Discussion Papers 684, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  15. repec:cdl:agrebk:663536 is not listed on IDEAS
  16. Novshek, William & Sonnenschein, Hugo, 1979. "Marginal Consumers and Neoclassical Demand Theory," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1368-76, December.
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Cited by:
  1. Reynaert, Mathias & Verboven, Frank, 2014. "Improving the performance of random coefficients demand models: The role of optimal instruments," Journal of Econometrics, Elsevier, vol. 179(1), pages 83-98.

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