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Neural Demand Estimation with Habit Formation and Rationality Constraints

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  • Grzeskiewicz, M.

Abstract

State dependence is empirically important in repeat-purchase demand and can materially change welfare conclusions from price variation. To this end, we introduce a flexible neural demand system for continuous budget allocation that allows current choices to depend on a low-dimensional summary of purchase history. In Dominick’s scanner data on analgesics, augmenting demand with a habit state reduces out-of-sample prediction error by about 33% relative to standard share systems, and a shuffled-history placebo eliminates the gain, indicating that the improvement reflects meaningful dynamics rather than additional covariates. State dependence also changes economic conclusions: conditioning on the habit state col-lapses the apparent aspirin–ibuprofen cross-price effect toward zero while preserving robust acetaminophen–ibuprofen substitution. These differences translate into welfare: for a 10% ibuprofen price increase, the habit specification implies compensating-variation losses about 15–16% larger than a static model. We also provide simulation evidence with known ground truth and report diagnostics of near-integrability to support welfare calculations. The code is available at https://github.com/martagrz/neural_demand_habit.

Suggested Citation

  • Grzeskiewicz, M., 2026. "Neural Demand Estimation with Habit Formation and Rationality Constraints," Cambridge Working Papers in Economics 2613, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:2613
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    References listed on IDEAS

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    1. Fedor Iskhakov & John Rust & Bertel Schjerning, 2020. "Machine learning and structural econometrics: contrasts and synergies," The Econometrics Journal, Royal Economic Society, vol. 23(3), pages 81-124.
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    3. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    4. Rosa L. Matzkin, 2003. "Nonparametric Estimation of Nonadditive Random Functions," Econometrica, Econometric Society, vol. 71(5), pages 1339-1375, September.
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    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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