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Instrument-free Identification and Estimation of Differentiated Products Models

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  • Byrne, David
  • Imai, Susumu
  • Sarafidis, Vasilis
  • Hirukawa, Masayuki

Abstract

We propose a new methodology for estimating the demand and cost functions of dierentiated products models when demand and cost data are available. The method deals with the endogeneity of prices to demand shocks and the endogeneity of outputs to cost shocks, but does not require instruments for identication. We establish non-parametric identication, consistency and asymptotic normality of our estimator. Using Monte-Carlo experiments, we show our method works well in contexts where instruments are correlated with demand and cost shocks, and where commonly-used instrumental variables estimators are biased and numerically unstable.

Suggested Citation

  • Byrne, David & Imai, Susumu & Sarafidis, Vasilis & Hirukawa, Masayuki, 2015. "Instrument-free Identification and Estimation of Differentiated Products Models," Queen's Economics Department Working Papers 274662, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:274662
    DOI: 10.22004/ag.econ.274662
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