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Nested logit or random coefficients logit? A comparison of alternative discrete choice models of product differentiation

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  • Grigolon, Laura
  • Verboven, Frank

Abstract

We start from an aggregate random coefficients nested logit (RCNL) model to provide a systematic comparison between the tractable logit and nested logit (NL) models with the computationally more complex random coefficients logit (RC) model. We first use simulated data to assess possible parameter biases when the true model is a RCNL model. We then use data on the automobile market to estimate the different models, and as an illustration assess what they imply for competition policy analysis. As expected, the simple logit model is rejected against the NL and RC model, but both of these models are in turn rejected against the more general RCNL model. While the NL and RC models result in quite different substitution patterns, they give robust policy conclusions on the predicted price effects from mergers. In contrast, the conclusions for market definition are not robust across different demand models. In general, our findings suggest that it is important to account for sources of market segmentation that are not captured by continuous characteristics in the RC model.

Suggested Citation

  • Grigolon, Laura & Verboven, Frank, 2011. "Nested logit or random coefficients logit? A comparison of alternative discrete choice models of product differentiation," CEPR Discussion Papers 8584, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8584
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    References listed on IDEAS

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    1. Robert C. Feenstra & James A. Levinsohn, 1995. "Estimating Markups and Market Conduct with Multidimensional Product Attributes," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 19-52.
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    More about this item

    Keywords

    automobile market; competition policy; discrete choice; nested logit; random coefficients logit;

    JEL classification:

    • L00 - Industrial Organization - - General - - - General
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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