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Portfolio Considerations in Differentiated Product Purchases: An Application to the Japanese Automobile Market

  • Naoki Wakamori

Consumers often purchase more than one differentiated product, assembling a portfolio, which might potentially affect substitution patterns of demand and, as a consequence, oligopolistic firms’ pricing strategies. This paper studies such consumers’ portfolio considerations by developing a structural model that allows for flexible complementarities/substitutabilities depending on consumer attributes and product characteristics. I estimate the model using Japanese household-level data on automobile purchasing decisions. My estimates suggest that complementarities arise when households purchase a combination of one small automobile and one minivan as their portfolio. Ignoring such effects leads to a overstated counterfactual analysis. Simulation results suggest that a policy proposal of repealing the current tax subsidies for small ecofriendly automobiles would decrease the demand for those automobiles by 9%; less than the 14% drop predicted by a standard single discrete choice model.

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Paper provided by Bank of Canada in its series Working Papers with number 11-27.

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Length: 46 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:bca:bocawp:11-27
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