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Unobserved Product Differentiation in Discrete Choice Models: Estimating Price Elasticities and Welfare Effects

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  • Daniel A. Ackerberg
  • Marc Rysman

Abstract

Standard discrete choice models such as logit, nested logit, and random coefficients models place very strong restrictions on how unobservable product space increases with the number of products. We argue (and show with Monte Carlo experiments) that these restrictions can lead to biased conclusions regarding price elasticities and welfare consequences from additional products. In addition, these restrictions can identify parameters which are not intuitively identified given the data at hand. We suggest two alternative models that relax these restrictions, both motivated by structural interpretations. Monte-Carlo experiments and an application to data show that these alternative models perform well in practice.

Suggested Citation

  • Daniel A. Ackerberg & Marc Rysman, 2002. "Unobserved Product Differentiation in Discrete Choice Models: Estimating Price Elasticities and Welfare Effects," NBER Working Papers 8798, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8798
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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