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What Happens When Demand Is Estimated With A Misspecified Model?

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  • DONGLING HUANG
  • CHRISTIAN ROJAS
  • FRANK BASS

Abstract

We conduct Monte Carlo experiments to investigate the biases of assuming a misspecified demand model. We study continuous models (linear, log‐linear and AIDS), and discrete choice models (logit) in the context of differentiated products and aggregate data. Estimating demand with the ‘wrong’ model yields varying degrees of bias in estimated elasticities, but the logit model can yield unbiased estimates for a certain size of the assumed market potential. Merger simulations confirm the key importance of market potential in logit estimation suggesting that a discrete choice model may be preferable even when the discreteness of the purchase decision is questionable.

Suggested Citation

  • Dongling Huang & Christian Rojas & Frank Bass, 2008. "What Happens When Demand Is Estimated With A Misspecified Model?," Journal of Industrial Economics, Wiley Blackwell, vol. 56(4), pages 809-839, December.
    • Handle: RePEc:bla:jindec:v:56:y:2008:i:4:p:809-839
    DOI: 10.1111/j.1467-6451.2008.00361.x
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    Cited by:

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    3. Nathan H. Miller & Marc Remer & Conor Ryan & Gloria Sheu, 2016. "Pass-Through and the Prediction of Merger Price Effects," Journal of Industrial Economics, Wiley Blackwell, vol. 64(4), pages 683-709, December.
    4. Badruddoza, Syed & Amin, Modhurima & McCluskey, Jill, 2019. "Assessing the Importance of an Attribute in a Demand SystemStructural Model versus Machine Learning," Working Papers 2019-5, School of Economic Sciences, Washington State University.
    5. Hirsch, Stefan, 2022. "Product placement in the meat substitute sector: Evidence from a spatial demand model," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322181, Agricultural and Applied Economics Association.
    6. Bokhari, Farasat A.S. & Mariuzzo, Franco, 2018. "Demand estimation and merger simulations for drugs: Logits v. AIDS," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 653-685.
    7. Khanal, Binod & Lopez, Rigoberto, 2021. "Demand for Plant Based Beverages and Market Competition in Fluid Milk Markets," 2021 Conference, August 17-31, 2021, Virtual 315369, International Association of Agricultural Economists.
    8. Verboven, Frank & Björnerstedt, Jonas, 2012. "Does Merger Simulation Work? A "Natural Experiment" in the Swedish Analgesics Market Market," CEPR Discussion Papers 9027, C.E.P.R. Discussion Papers.
    9. Bimbo, Francesco & Bonanno, Alessandro & Viscecchia, Rosaria, 2019. "An empirical framework to study food labelling fraud: an application to the Italian extra-virgin olive oil market," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 63(4), October.
    10. Heng, Yan & Peterson, Hikaru, 2014. "Estimating Demand for Differentiated Eggs Using Scanner Data," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170457, Agricultural and Applied Economics Association.
    11. Dongling Huang & Christian Rojas, 2013. "The Outside Good Bias in Logit Models of Demand with Aggregate Data," Economics Bulletin, AccessEcon, vol. 33(1), pages 198-206.
    12. Chun-Yu Ho, 2010. "Deregulation, competition and consumer welfare in a banking market: evidence from Hong Kong," Journal of Regulatory Economics, Springer, vol. 37(1), pages 70-97, February.
    13. Miller, Nathan H. & Remer, Marc & Ryan, Conor & Sheu, Gloria, 2017. "Upward pricing pressure as a predictor of merger price effects," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 216-247.
    14. Bonnet, Céline & Bouamra-Mechemache, Zohra & Corre, Tifenn, 2018. "An Environmental Tax Towards More Sustainable Food: Empirical Evidence of the Consumption of Animal Products in France," Ecological Economics, Elsevier, vol. 147(C), pages 48-61.
    15. Ryo Sakamoto & Kyle Stiegert, 2018. "Comparing competitive toughness to benchmark outcomes in retail oligopoly pricing," Agribusiness, John Wiley & Sons, Ltd., vol. 34(1), pages 44-60, December.
    16. Zulehner, Christine & Gugler, Klaus Peter & Weichselbaumer, Michael, 2015. "Analysis of mergers in first-price auctions," CEPR Discussion Papers 10799, C.E.P.R. Discussion Papers.
    17. Vivienne Pham & David Prentice, 2013. "A Random Coefficients Logit Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry," Working Papers 2013.04, School of Economics, La Trobe University.
    18. Zhaoxin Liu & Erik Ansink, 2024. "Price elasticities of meat, fish and plant-based meat substitutes: evidence from store-level Dutch supermarket scanner data," Tinbergen Institute Discussion Papers 24-046/VIII, Tinbergen Institute.

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