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Nested Logit or Random Coefficients Logit? A Comparison of Alternative Discrete Choice Models of Product Differentiation

Author

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  • Laura Grigolon

    (McMaster University)

  • Frank Verboven

    (University of Leuven and CEPR)

Abstract

We propose a random coefficients nested logit (RCNL) model to compare the tractable nested logit (NL) model with the more complex random coefficients logit (RC) model. After a simulation study, we use data on the European automobile market. Both the NL and RC models are rejected against the RCNL model. The RC model results in different substitution patterns and a wider market definition than the NL and RCNL models. Nevertheless, the predicted price effects from mergers are robust across models. Our findings stress the importance of accounting for discrete sources of market segmentation not captured by continuous product characteristics.

Suggested Citation

  • Laura Grigolon & Frank Verboven, 2014. "Nested Logit or Random Coefficients Logit? A Comparison of Alternative Discrete Choice Models of Product Differentiation," The Review of Economics and Statistics, MIT Press, vol. 96(5), pages 916-935, December.
  • Handle: RePEc:tpr:restat:v:96:y:2014:i:5:p:916-935
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    References listed on IDEAS

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    1. Robert C. Feenstra & James A. Levinsohn, 1995. "Estimating Markups and Market Conduct with Multidimensional Product Attributes," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 19-52.
    2. Jean-Pierre H. Dubé & Jeremy T. Fox & Che-Lin Su, 2009. "Improving the Numerical Performance of BLP Static and Dynamic Discrete Choice Random Coefficients Demand Estimation," NBER Working Papers 14991, National Bureau of Economic Research, Inc.
    3. Pinelopi Koujianou Goldberg & Frank Verboven, 2001. "The Evolution of Price Dispersion in the European Car Market," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 811-848.
    4. Jo Reynaerts & Ravi Varadhan & John C. Nash, 2012. "Enhancing the Convergence Properties of the BLP (1995) Contraction Mapping," Working Papers of VIVES - Research Centre for Regional Economics 35, KU Leuven, Faculty of Economics and Business (FEB), VIVES - Research Centre for Regional Economics.
    5. Bresnahan, Timothy F., 1981. "Departures from marginal-cost pricing in the American automobile industry : Estimates for 1977-1978," Journal of Econometrics, Elsevier, vol. 17(2), pages 201-227, November.
    6. Chamberlain, Gary, 1987. "Asymptotic efficiency in estimation with conditional moment restrictions," Journal of Econometrics, Elsevier, vol. 34(3), pages 305-334, March.
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    8. Frank Verboven, 1996. "International Price Discrimination in the European Car Market," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 240-268, Summer.
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    10. Wojcik, Charlotte, 2000. "Alternative models of demand for automobiles," Economics Letters, Elsevier, vol. 68(2), pages 113-118, August.
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    More about this item

    Keywords

    nested logit model; random coefficients next logit model;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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