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Demand Estimation with Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach

  • C. Lanier Benkard
  • Patrick Bajari
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    We study the identification and estimation of Gorman-Lancaster style hedonic models of demand for differentiated products for the case when one product characteristic is not observed. Our identification and estimation strategy is a two-step approach in the spirit of Rosen (1974). Relative to Rosen's approach, we generalize the first stage estimation to allow for a single dimensional unobserved product characteristic, and also allow the hedonic pricing function to have a general, non-additive structure. In the second stage, if the product space is continuous and the functional form of utility is known then there exists an inversion between the consumer's choices and her preference parameters. This inversion can be used to recover the distribution of random coefficients nonparametrically. For the more common case when the set of products is finite, we use the revealed preference conditions from the hedonic model to develop a Gibbs sampling estimator for the distribution of random coefficients. We apply our methods to estimating personal computer demand.

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    File URL: http://www.nber.org/papers/w10278.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10278.

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    Date of creation: Feb 2004
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    Publication status: published as Benkard, C. Lenair and Patrick Bajari. "Hedonic Price Indexes With Unobserved Product Characteristics," Journal of Business and Economic Statistics, 2005, v23(1,Jan), 61-75.
    Handle: RePEc:nbr:nberwo:10278
    Note: IO PR
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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