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Fast, "Robust", and Approximately Correct: Estimating Mixed Demand Systems

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  • Bernard Salanié
  • Frank A. Wolak

Abstract

Many econometric models used in applied work integrate over unobserved heterogeneity. We show that a class of these models that includes many random coefficients demand systems can be approximated by a “small-σ” expansion that yields a linear two-stage least squares estimator. We study in detail the models of product market shares and prices popular in empirical IO. Our estimator is only approximately correct, but it performs very well in practice. It is extremely fast and easy to implement, and it is “robust” to changes in the higher moments of the distribution of the random coefficients. At the very least, it provides excellent starting values for more commonly used estimators of these models.

Suggested Citation

  • Bernard Salanié & Frank A. Wolak, 2019. "Fast, "Robust", and Approximately Correct: Estimating Mixed Demand Systems," NBER Working Papers 25726, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25726
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    Cited by:

    1. Mayer, Thierry & Head, Keith, 2021. "Poor Substitutes? Counterfactual methods in IO and Trade compared," CEPR Discussion Papers 16762, C.E.P.R. Discussion Papers.
    2. Roy Allen & John Rehbeck, 2020. "Counterfactual and Welfare Analysis with an Approximate Model," Papers 2009.03379, arXiv.org.
    3. Christopher Conlon & Jeff Gortmaker, 2020. "Best practices for differentiated products demand estimation with PyBLP," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 1108-1161, December.
    4. Taburet, Arthur & Polo, Alberto & Vo, Quynh-Anh, 2024. "Screening using a menu of contracts: a structural model of lending markets," Bank of England working papers 1057, Bank of England.

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    JEL classification:

    • L00 - Industrial Organization - - General - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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