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Demand and supply estimation biases due to omission of durability

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  • Chen, Jiawei
  • Esteban, Susanna
  • Shum, Matthew

Abstract

We build a dynamic equilibrium model of a durable goods oligopoly with a competitive secondary market to evaluate the bias in estimating the structural parameters of demand and supply when durability is omitted. We simulate data from our dynamic model and use them to estimate the model's static counterpart. We find that the static estimate of the elasticity of demand is an overestimate of the true elasticity and that the static estimate of the markup is an underestimate. Our results provide a benchmark on the magnitude and sign of the bias when static models are used for economic inference.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304-4076(08)00140-1
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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 147 (2008)
Issue (Month): 2 (December)
Pages: 247-257

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Handle: RePEc:eee:econom:v:147:y:2008:i:2:p:247-257
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

Keywords: Durable goods Secondary markets Estimation bias Demand elasticity Mark-up;

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Cited by:

  1. Andrikopoulos, Athanasios & Markellos, Raphael N., 2015. "Dynamic interaction between markets for leasing and selling automobiles," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 260-270.
  2. Chen, Jiawei & Esteban, Susanna & Shum, Matthew, 2010. "Do sales tax credits stimulate the automobile market?," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 397-402, July.
  3. Weifang Lou & David Prentice & Xiangkang Yin, 2008. "The Effects of Product Ageing on Demand: The Case of Digital Cameras," Working Papers 2008.06, School of Economics, La Trobe University.
  4. Lou, Weifang & Prentice, David & Yin, Xiangkang, 2012. "What difference does dynamics make? The case of digital cameras," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 30-40.

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