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

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  • Naoki Wakamori

Abstract

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.

Suggested Citation

  • Naoki Wakamori, 2011. "Portfolio Considerations in Differentiated Product Purchases: An Application to the Japanese Automobile Market," Staff Working Papers 11-27, Bank of Canada.
  • Handle: RePEc:bca:bocawp:11-27
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    Cited by:

    1. James Archsmith & Kenneth Gillingham & Christopher R. Knittel & David S. Rapson, 2017. "Attribute Substitution in Household Vehicle Portfolios," NBER Working Papers 23856, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Economic models; Market structure and pricing;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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