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Endogenous Product Choice: A Progress Report

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Listed author(s):
  • Crawford, Gregory S

Abstract

Empirical models of differentiated product demand are widely used by both academics and practitioners. While these methods treat carefully the potential endogeneity of price, until recently they have assumed the number and characteristics of the products offered by firms are exogenous. This paper presents a progress report on an ongoing research agenda to address this issue. First, it summarizes how the appropriate choice of 'orthogonal' instruments can yield consistent estimates of own and cross-price elasticities in the presence of endogenous product characteristics. Second, it summarizes how to measure 'quality markups' and the welfare consequences of endogenous product quality in U.S. cable television markets. Related papers and extensions to consider multiple product characteristics and dynamics are also discussed.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8862.

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Date of creation: Feb 2012
Handle: RePEc:cpr:ceprdp:8862
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Keywords: Cable television; Endogenous product characteristics; Endogenous product choice; Endogenous quality; Orthogonal instruments; Welfare;

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Find related papers by JEL classification:
  • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
  • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
  • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
  • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
  • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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  1. Matt Shum & G Crawford, 2003. "Monopoly Quality Degradation in Cable Television," Economics Working Paper Archive 502, The Johns Hopkins University,Department of Economics.
  2. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
  3. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
  4. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
  5. Michaela Draganska & Michael Mazzeo & Katja Seim, 2009. "Beyond plain vanilla: Modeling joint product assortment and pricing decisions," Quantitative Marketing and Economics (QME), Springer, vol. 7(2), pages 105-146, June.
  6. Tenn, Steven & Froeb, Luke & Tschantz, Steven, 2010. "Mergers when firms compete by choosing both price and promotion," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 695-707, November.
  7. David P.Byrne, 2011. "Consolidation and Price Discrimination in the Cable Television Industry," Department of Economics - Working Papers Series 1118, The University of Melbourne.
  8. James Levinsohn & Steven Berry & Ariel Pakes, 1999. "Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy," American Economic Review, American Economic Association, vol. 89(3), pages 400-430, June.
  9. Rachel Griffith & Lars Nesheim & Martin O'Connell, 2010. "Sin taxes in differentiated product oligopoly: an application to the butter and margarine market," CeMMAP working papers CWP37/10, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  10. Gregory S. Crawford & Oleksandr Shcherbakov & Matthew Shum, 2015. "The welfare effects of endogenous quality choice in cable television markets," ECON - Working Papers 202, Department of Economics - University of Zurich.
  11. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
  12. Brian McManus, 2007. "Nonlinear pricing in an oligopoly market: the case of specialty coffee," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 512-532, 06.
  13. Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 277-311.
  14. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  15. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  16. Alon Eizenberg, 2014. "Upstream Innovation and Product Variety in the U.S. Home PC Market," Review of Economic Studies, Oxford University Press, vol. 81(3), pages 1003-1045.
  17. Steven T. Berry & Joel Waldfogel, 2001. "Do Mergers Increase Product Variety? Evidence from Radio Broadcasting," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 1009-1025.
  18. Andrew Sweeting, 2010. "The effects of mergers on product positioning: evidence from the music radio industry," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 372-397.
  19. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
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Cited by:

  1. Reynaert, Mathias & Verboven, Frank, 2014. "Improving the performance of random coefficients demand models: The role of optimal instruments," Journal of Econometrics, Elsevier, vol. 179(1), pages 83-98.
  2. Ying Fan & Chenyu Yang, 2014. "Competition, Product Proliferation and Welfare: A Study of the U.S. Smartphone Market," Working Papers 14-14, NET Institute.
  3. Jiekai ZHANG, 2016. "The impact of advertising length caps on TV: Evidence from the French broadcast TV industry," Working Papers 16-06, NET Institute.
  4. Mitsukuni Nishida, 2012. "Estimating a Model of Strategic Network Choice: The Convenience-Store Industry in Okinawa," Economics Working Paper Archive 594, The Johns Hopkins University,Department of Economics.
  5. Crawford, Gregory S. & Shcherbakov, Oleksandr & Shum, Matthew, 2015. "The Welfare Effects of Endogenous Quality Choice in Cable Television Markets," CEPR Discussion Papers 10793, C.E.P.R. Discussion Papers.
  6. Francesco Decarolis & Andrea Guglielmo, 2016. "Insurers' Response to Selection Risk: Evidence from Medicare Enrollment Reforms," NBER Working Papers 22876, National Bureau of Economic Research, Inc.
  7. David P. Byrne & Susumu Imai & Vasilis Sarafidis & Masayuki Hirukawa, 2015. "Instrument-free Identification and Estimation of Differentiated Products Models," Working Paper Series 26, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
  8. Aguirregabiria, Victor & Slade, Margaret E., 2017. "Empirical Models of Firms and Industries," Microeconomics.ca working papers margaret_e._slade-2017-4, Vancouver School of Economics, revised 27 Apr 2017.

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