Control Function Corrections for Unobserved Factors in Differentiated Product Models
AbstractUnobserved factors in differentiated product models can generate severe bias in price elasticities. We develop a generalized control function method and specification test for this setting based on the nonparametric identification results from Petrin (2005), who shows the assumptions under which price functions can be inverted to obtain controls that condition on the part of the demand error that is not independent of price. Unlike using product-market controls, our approach does not require additive separability between observed and unobserved factors. We develop a ``hybrid'' approach that also loosens this restriction for that setting. We compare results across approaches on three data sets and demand specifications estimated elsewhere that span a range of markets and levels of aggregation, including automobiles (the original Berry, Levinsohn, and Pakes (1995) application), cable television, and margarine. The estimated elasticities are similar across the control function and product-market control approaches, and they both differ significantly from the uncorrected elasticity estimates, which are significantly biased up in every case
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 856.
Date of creation: 03 Dec 2006
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
endogenous prices; differentiated product models;
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C29 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Other
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Niklas Potrafke, 2010. "Does government ideology influence deregulation of product markets? Empirical evidence from OECD countries," Public Choice, Springer, vol. 143(1), pages 135-155, April.
- Terza, Joseph V. & Basu, Anirban & Rathouz, Paul J., 2008. "Two-stage residual inclusion estimation: Addressing endogeneity in health econometric modeling," Journal of Health Economics, Elsevier, vol. 27(3), pages 531-543, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.