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Measuring Substitution Patterns in Differentiated Products Industries

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  • Amit Gandhi
  • Jean-François Houde

Abstract

We study the estimation of substitution patterns within the discrete choice framework developed by Berry (1994) and Berry, Levinsohn, and Pakes (1995). Our objective, is to illustrate the consequences of using weak instruments in this non-linear GMM context, and propose a new class of instruments that can be used to estimate a large family of models with aggregate data. We argue that relevant instruments should reflect the (exogenous) degree of differentiation of each product in a market (Differentiation IVs), and provide a series of examples to illustrate the performance of simple instrument functions.

Suggested Citation

  • Amit Gandhi & Jean-François Houde, 2019. "Measuring Substitution Patterns in Differentiated Products Industries," NBER Working Papers 26375, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26375
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    More about this item

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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