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The Logit as a Model of Product Differentiation: Further Results and Extensions

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  • Simon P. Anderson
  • Andre de Palma

Abstract

There is a growing interest in using the discrete choice approach to study oligopolistic competition under product differentiation, and a prominent discrete choic model is the multinomial logit. Here we analyze various aspects of the logit in this context. We first show that the predictions of the logit are very similar to those of the well-known CES model and explain why this is so. We next discuss the existence and the uniqueness of a price equilibrium for a general version of the logit. We illustrate (using the logit) the flexibility and tractability of the discrete choic approach for two diferent problems. The first of these finds a free-entry equlibrium with multiproduct firms. The second uses the logit to construct a simple search model. We also introduce the nested logit as an oligopoly model and apply it to these two problems.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 913.

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Date of creation: Dec 1989
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Handle: RePEc:nwu:cmsems:913

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Keywords: Discrete choice model; CES model oligopolistic competition; multiple product firms; nested logit model.;

References

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  1. Sattinger, Michael, 1984. "Value of an Additional Firm in Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 321-32, April.
  2. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, vol. 57(5), pages 995-1026, September.
  3. Perloff, Jeffrey M & Salop, Steven C, 1985. "Equilibrium with Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 107-20, January.
  4. Victor Ginsburgh & André De Palma & Yorgo Papageorgiou & Jacques-François Thisse, 1985. "The principle of minimum differentiation holds under sufficient heterogeneity," ULB Institutional Repository 2013/1759, ULB -- Universite Libre de Bruxelles.
  5. Anderson, Simon P & de Palma, Andre & Thisse, Jacques-Francois, 1989. "Demand for Differentiated Products, Discrete Choice Models, and the Characteristics Approach," Review of Economic Studies, Wiley Blackwell, vol. 56(1), pages 21-35, January.
  6. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
  7. ANDERSON, Simon & de PALMA, André & THISSE, Jacques-François, . "A representative consumer theory of the logit model," CORE Discussion Papers RP -805, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Daniel McFadden, 1977. "Modelling the Choice of Residential Location," Cowles Foundation Discussion Papers 477, Cowles Foundation for Research in Economics, Yale University.
  9. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
  10. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  11. Robert C. Feenstra & James A. Levinsohn, 1989. "Distance, Demand, and Oligopoly Pricing," NBER Working Papers 3076, National Bureau of Economic Research, Inc.
  12. Paul Krugman, 1982. "Trade in Differentiated Products and the Political Economy of Trade Liberalization," NBER Chapters, in: Import Competition and Response, pages 197-222 National Bureau of Economic Research, Inc.
  13. Anderson, Simon P. & De Palma, Andre & Thisse, Jacques-Francois, 1987. "The CES is a discrete choice model?," Economics Letters, Elsevier, vol. 24(2), pages 139-140.
  14. Roger W. Koenker & Martin K. Perry, 1981. "Product Differentiation, Monopolistic Competition, and Public Policy," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 217-231, Spring.
  15. ANDERSON, S. & de PALMA, A., 1986. "Market equilibrium and optimal product diversity: a logit specification," CORE Discussion Papers 1986008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  17. Lawrence, Colin & Spiller, Pablo T, 1983. "Product Diversity, Economies of Scale, and International Trade," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 63-83, February.
  18. Feenstra, Robert C & Judd, Kenneth L, 1982. "Tariffs, Technology Transfer, and Welfare," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1142-65, December.
  19. repec:fth:michin:245 is not listed on IDEAS
  20. Anderson, Simon P & de Palma, Andre, 1988. "Spatial Price Discrimination with Heterogeneous Products," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 573-92, October.
  21. Braid, Ralph M., 1988. "Heterogeneous preferences and non-central agglomeration of firms," Regional Science and Urban Economics, Elsevier, vol. 18(1), pages 57-68, February.
  22. Deneckere, Raymond J & Rothschild, Michael, 1992. "Monopolistic Competition and Preference Diversity," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 361-73, April.
  23. Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-40, May.
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