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The Inverse Product Differentiation Logit Model

Author

Listed:
  • Mogens Fosgerau
  • Julien Monardo
  • André de Palma

Abstract

We introduce the inverse product differentiation logit (IPDL) model, a micro-founded inverse market share model for differentiated products that captures market segmentation according to one or more characteristics. The IPDL model generalizes the nested logit model to allow richer substitution patterns, including complementarity in demand, and can be estimated by linear instrumental variable regression with market-level data. Furthermore, we provide Monte Carlo experiments comparing the IPDL model to the workhorse empirical models of the literature. Lastly, we demonstrate the empirical performance of the IPDL model using a well-known dataset on the ready-to-eat cereal market.

Suggested Citation

  • Mogens Fosgerau & Julien Monardo & André de Palma, 2024. "The Inverse Product Differentiation Logit Model," American Economic Journal: Microeconomics, American Economic Association, vol. 16(4), pages 329-370, November.
    • Handle: RePEc:aea:aejmic:v:16:y:2024:i:4:p:329-70
    DOI: 10.1257/mic.20210066
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    Cited by:

    1. Mogens Fosgerau & Emerson Melo & André de Palma & Matthew Shum, 2020. "Discrete Choice And Rational Inattention: A General Equivalence Result," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(4), pages 1569-1589, November.
    2. David Muller & Emerson Melo & Ruben Schlotter, 2023. "A Distributionally Robust Random Utility Model," Papers 2303.05888, arXiv.org.
    3. Afonso Rodrigues, 2025. "Consumer Choice Over Shopping Baskets: A Linear Demand Approach," Papers 2511.11846, arXiv.org.
    4. Steven T. Berry & Philip A. Haile, 2021. "Foundations of Demand Estimation," NBER Working Papers 29305, National Bureau of Economic Research, Inc.
    5. Soetevent, Adriaan R., 2024. "I’d like to move it! The effect of consumption rivalry on demand estimation: Evidence from the EV public charging market," Journal of Environmental Economics and Management, Elsevier, vol. 124(C).
    6. Dubé, Jean-Pierre & Joo, Joonhwi & Kim, Kyeongbae, 2025. "Discrete/continuous choice models and representative consumer theory," Journal of Economic Theory, Elsevier, vol. 226(C).
    7. Soetevent, Adriaan R., 2021. "I’d Like to Move It! Consumption Rivalry in the EV Public Charging Market: Demand Estimation with Deterministic Choice Set Variation," EconStor Preprints 228520, ZBW - Leibniz Information Centre for Economics.
    8. Roy Allen & John Rehbeck, 2020. "Identification of Random Coefficient Latent Utility Models," Papers 2003.00276, arXiv.org.
    9. Alessandro Iaria, & Wang, Ao, 2021. "An Empirical Model of Quantity Discounts with Large Choice Sets," The Warwick Economics Research Paper Series (TWERPS) 1378, University of Warwick, Department of Economics.
    10. Mogens Fosgerau & John Rehbeck, 2023. "Nontransitive Preferences and Stochastic Rationalizability: A Behavioral Equivalence," Papers 2304.14631, arXiv.org.
    11. Huo, Jinghai & Dua, Rubal & Bansal, Prateek, 2024. "Inverse product differentiation logit model: Holy grail or not?," Energy Economics, Elsevier, vol. 131(C).
    12. Leandro Benitez & German Coloma, 2022. "Estimación de demanda y simulación de concentraciones horizontales: el caso de Coca-Cola y AdeS en Argentina," Revista de Economía del Rosario, Universidad del Rosario, vol. 25(2), pages 1-22.
    13. Wang, Ao, 2021. "A BLP Demand Model of Product-Level Market Shares with Complementarity," The Warwick Economics Research Paper Series (TWERPS) 1351, University of Warwick, Department of Economics.
    14. Iaria, Alessandro & ,, 2020. "Identification and Estimation of Demand for Bundles," CEPR Discussion Papers 14363, C.E.P.R. Discussion Papers.
    15. Clark, Robert & Gong, Yiran, 2024. "Why do some new products fail? Evidence from the entry and exit of Vanilla Coke," International Journal of Industrial Organization, Elsevier, vol. 97(C).
    16. Allen, Roy, 2022. "Injectivity and the law of demand," Economics Letters, Elsevier, vol. 215(C).

    More about this item

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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