Estimating demand elasticities in a differentiated product industry: the personal computer market
Supply and demand functions are typically estimated using uniform prices and quantities across products, but where products are heterogeneous, it is important to consider quality differences explicitly. This paper demonstrates a new approach to doing this by employing hedonic coefficients to estimate price elasticities for differentiated products in the market for personal computers. Differences among products are modeled as distances in a linear quality space derived from a multi-dimensional attribute space. Heterogeneous quality allows for the estimation of varying demand elasticities among models, using models' relative positions as measures of market power. Instead of restricting market competition to the two nearest models, as is typically done in the differentiated-product literature, cross-elasticities of substitution are allowed to decline continuously with distance between models in quality space. Using data on prices, technical attributes, and shipments of personal computers sold in the United States from 1977 to 1988, two-stage least squares estimates of demand elasticities are obtained. The estimated elasticities vary across models and over time, and are consistent with observed changes in market structure. Entrant firms, as well as new models, are found to face more elastic demand. The estimated elasticities are used to calculate price-cost markups and industry profit-revenue ratios. Both measures decline significantly, indicating a decrease in industry profitability over time, as the market became more competitive.
|Date of creation:||1995|
|Date of revision:|
|Publication status:||Published in Journal of Economics and Business (July/August 1997).|
|Contact details of provider:|| Postal: |
Web page: http://www.bos.frb.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
- Gelfand, Matthew D. & Spiller, Pablo T., 1987. "Entry barriers and multiproduct oligopolies: Do they forebear or spoil?," International Journal of Industrial Organization, Elsevier, vol. 5(1), pages 101-113, March.
- Schmalensee, Richard., 1980.
"Product differentiation advantages of pioneering brands,"
1140-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-65, June.
- Bresnahan, Timothy F., 1981. "Departures from marginal-cost pricing in the American automobile industry : Estimates for 1977-1978," Journal of Econometrics, Elsevier, vol. 17(2), pages 201-227, November.
- Feenstra, Robert C & Levinsohn, James A, 1995. "Estimating Markups and Market Conduct with Multidimensional Product Attributes," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 19-52, January.
When requesting a correction, please mention this item's handle: RePEc:fip:fedbwp:95-9. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio)
If references are entirely missing, you can add them using this form.