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Identification and Estimation of Demand Models with Endogenous Product Entry and Exit

Author

Listed:
  • Aguirregabiria, Victor
  • Iaria, Alessandro
  • Sokullu, Senay

Abstract

This paper deals with the endogeneity of firms’ entry and exit decisions in demand estimation. Product entry decisions lack a single crossing property in terms of demand unobservables, which causes the inconsistency of conventional methods dealing with selection. We present a novel and straightforward two-step approach to estimate demand while addressing endogenous product entry. In the first step, our method estimates a finite mixture model of product entry accommodating latent market types. In the second step, it estimates demand controlling for the propensity scores of all latent market types. We apply this approach to data from the airline industry.

Suggested Citation

  • Aguirregabiria, Victor & Iaria, Alessandro & Sokullu, Senay, 2023. "Identification and Estimation of Demand Models with Endogenous Product Entry and Exit," CEPR Discussion Papers 18398, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18398
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    File URL: https://cepr.org/publications/DP18398
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    Cited by:

    1. is not listed on IDEAS
    2. Hui Liu & Yao Luo, 2025. "Demand Analysis under Price Rigidity and Endogenous Assortment: An Application to China's Tobacco Industry," Papers 2501.17251, arXiv.org.
    3. Yue Cao & Judith A. Chevalier & Jessie Handbury & Hayden Parsley & Kevin R. Williams, 2026. "Willingness To Travel With Endogenous Distance: Evidence From The Changing Retail Landscape," Cowles Foundation Discussion Papers 2508, Cowles Foundation for Research in Economics, Yale University.

    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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