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Tests for Price Endogeneity in Differentiated Product Models

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  • Kyoo il Kim
  • Amil Petrin

Abstract

We develop simple tests for endogenous prices arising from omitted demand factors in discrete choice models. Our approach only requires one to locate testing proxies that have some correlation with the omitted factors when prices are endogenous. We use the difference between prices and their predicted values given observed demand and supply factors. If prices are exogenous, these proxies should not explain demand given prices and other explanatory variables. We reject exogeneity if these proxies enter significantly in utility as additional explanatory variables. The tests are easy to implement as we show with several Monte Carlos and discuss for three recent demand applications.

Suggested Citation

  • Kyoo il Kim & Amil Petrin, 2013. "Tests for Price Endogeneity in Differentiated Product Models," NBER Working Papers 19011, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19011
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    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • L0 - Industrial Organization - - General

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