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WHAT HAPPENS WHEN DEMAND IS ESTIMATED WITH A MISSPECIFIED MODEL? -super-

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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. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics.

Suggested Citation

  • Dongling Huang & Christian Rojas & Frank Bass, 2008. "WHAT HAPPENS WHEN DEMAND IS ESTIMATED WITH A MISSPECIFIED MODEL? -super-," 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
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    Cited by:

    1. Vivienne Pham & David Prentice, 2010. "An empirical Analysis of the Counter-factual: A Merger and Divestiture in the Australian Cigarette Industry," Working Papers 2010.08, School of Economics, La Trobe University.
    2. repec:bla:jindec:v:64:y:2016:i:4:p:683-709 is not listed on IDEAS
    3. repec:eee:indorg:v:52:y:2017:i:c:p:216-247 is not listed on IDEAS
    4. 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.
    5. 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.

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