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The flexible coefficient multinomial logit (FC-MNL) model of demand for differentiated products

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  • Peter Davis
  • Pasquale Schiraldi

Abstract

type="main"> We show FC-MNL is flexible in the sense of Diewert ([Diewert, E., 1974]), thus its parameters can be chosen to match a well-defined class of possible own- and cross-price elasticities of demand. In contrast to models such as Probit and Random Coefficient-MNL models, FC-MNL does not require estimation via simulation; it is fully analytic. Under well-defined and testable parameter restrictions, FC-MNL is shown to be an unexplored member of McFadden's class of Multivariate Extreme Value discrete-choice models. Therefore, FC-MNL is fully consistent with an underlying structural model of heterogeneous, utility-maximizing consumers. We provide a Monte-Carlo study to establish its properties and we illustrate its use by estimating the demand for new automobiles in Italy.

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  • Peter Davis & Pasquale Schiraldi, 2014. "The flexible coefficient multinomial logit (FC-MNL) model of demand for differentiated products," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 32-63, March.
  • Handle: RePEc:bla:randje:v:45:y:2014:i:1:p:32-63
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