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Demand estimation with infrequent purchases and small market sizes

Author

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  • Ali Hortaçsu
  • Olivia R. Natan
  • Hayden Parsley
  • Timothy Schwieg
  • Kevin R. Williams

Abstract

We propose a demand estimation method that allows for a large number of zero‐ sale observations, rich unobserved heterogeneity, and endogenous prices. We do so by modeling small market sizes through Poisson arrivals. Each of these arriving consumers solves a standard discrete choice problem. We present a Bayesian IV estimation approach that addresses sampling error in product shares and scales well to rich data environments. The data requirements are traditional market‐level data as well as a measure of market sizes or consumer arrivals. After presenting simulation studies, we demonstrate the method in an empirical application of air travel demand.

Suggested Citation

  • Ali Hortaçsu & Olivia R. Natan & Hayden Parsley & Timothy Schwieg & Kevin R. Williams, 2023. "Demand estimation with infrequent purchases and small market sizes," Quantitative Economics, Econometric Society, vol. 14(4), pages 1251-1294, November.
    • Handle: RePEc:wly:quante:v:14:y:2023:i:4:p:1251-1294
    DOI: 10.3982/QE2147
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