IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/8798.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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
    Note: PR
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w8798.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Robert C. Feenstra & James A. Levinsohn, 1995. "Estimating Markups and Market Conduct with Multidimensional Product Attributes," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 19-52.
    2. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    3. Patrick Bajari & C. Lanier Benkard, 2001. "Demand Estimation With Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," NBER Technical Working Papers 0272, National Bureau of Economic Research, Inc.
    4. Marc Rysman, 2004. "Competition Between Networks: A Study of the Market for Yellow Pages," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 483-512.
    5. Steven T. Berry & Joel Waldfogel, 1999. "Free Entry and Social Inefficiency in Radio Broadcasting," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 397-420, Autumn.
    6. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    7. Cardell, N. Scott, 1997. "Variance Components Structures for the Extreme-Value and Logistic Distributions with Application to Models of Heterogeneity," Econometric Theory, Cambridge University Press, vol. 13(2), pages 185-213, April.
    8. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    9. Benkard, C. Lanier & Bajari, Patrick, 2001. "Demand Estimation with Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," Research Papers 1691, Stanford University, Graduate School of Business.
    10. Patrick Bajari & C. Lanier Benkard, 2001. "Demand Estimation With Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," Working Papers 01010, Stanford University, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mariuzzo, Franco & Walsh, Patrick Paul & Whelan, Ciara, 2010. "Coverage of retail stores and discrete choice models of demand: Estimating price elasticities and welfare effects," International Journal of Industrial Organization, Elsevier, vol. 28(5), pages 555-578, September.
    2. Bonnet, Céline & Richards, Timothy J., 2016. "Models of Consumer Demand for Differentiated Products," TSE Working Papers 16-741, Toulouse School of Economics (TSE).
    3. Bonnet, Céline, 2007. "Économétrie de la concurrence entre produits différenciés : théorie et méthodes empiriques," L'Actualité Economique, Société Canadienne de Science Economique, vol. 83(4), pages 555-580, décembre.
    4. Lee Branstetter & Chirantan Chatterjee & Matthew J. Higgins, 2016. "Regulation and welfare: evidence from paragraph IV generic entry in the pharmaceutical industry," RAND Journal of Economics, RAND Corporation, vol. 47(4), pages 857-890, November.
    5. Kenneth C. Wilbur, 2008. "A Two-Sided, Empirical Model of Television Advertising and Viewing Markets," Marketing Science, INFORMS, vol. 27(3), pages 356-378, 05-06.
    6. Fève, Frédérique & Fève, Patrick & Florens, Jean-Pierre, 2002. "Attribute Choices and Structural Econometrics of Price Elasticity of Demand," IDEI Working Papers 155, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2003.
    7. Steven Berry & James Levinsohn & Ariel Pakes, 2004. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 68-105, February.
    8. Steven Berry & Alon Eizenberg & Joel Waldfogel, 2016. "Optimal product variety in radio markets," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 463-497, August.
    9. Pinelopi Koujianou Goldberg & Frank Verboven, 2001. "The Evolution of Price Dispersion in the European Car Market," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 811-848.
    10. Marc Ivaldi & Jiekai Zhang, 2017. "Advertising Competition in the Free-to-Air TV Broadcasting Industry," CESifo Working Paper Series 6461, CESifo.
    11. Junseok Hwang & Dongook Choi & Jongeun Oh & Yeonbae Kim, 2009. "Competition in the Korean Internet Portal Market: Network Effects, Profit, and Market Efficiency," TEMEP Discussion Papers 200925, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Nov 2009.
    12. Mitsuru Sunada, 2008. "Network effects with quality change: an empirical analysis of the Japanese mobile telecommunications market, 1995-2001," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(8), pages 657-674.
    13. Anocha Aribarg & Neeraj Arora, 2008. "—Interbrand Variant Overlap: Impact on Brand Preference and Portfolio Profit," Marketing Science, INFORMS, vol. 27(3), pages 474-491, 05-06.
    14. Bonnet, Céline & Dubois, Pierre & Simioni, Michel, 2004. "Two-Part Tariffs versus Linear Pricing between Manufacturers and Retailers: Empirical Tests on Differentiated Products Markets," IDEI Working Papers 370, Institut d'Économie Industrielle (IDEI), Toulouse, revised Apr 2006.
    15. Nathan H. Miller & Matthew Osborne, 2014. "Spatial differentiation and price discrimination in the cement industry: evidence from a structural model," RAND Journal of Economics, RAND Corporation, vol. 45(2), pages 221-247, June.
    16. Amit Khandelwal, 2010. "The Long and Short (of) Quality Ladders," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1450-1476.
    17. Margaret Aksoy-Pierson & Gad Allon & Awi Federgruen, 2013. "Price Competition Under Mixed Multinomial Logit Demand Functions," Management Science, INFORMS, vol. 59(8), pages 1817-1835, August.
    18. Ivaldi, Marc & Zhang, Jiekai, 2015. "Advertising Competition in the French Free-To-Air Television Broadcasting Industry," CEPR Discussion Papers 10762, C.E.P.R. Discussion Papers.
    19. Harikesh Nair & Pradeep Chintagunta & Jean-Pierre Dubé, 2004. "Empirical Analysis of Indirect Network Effects in the Market for Personal Digital Assistants," Quantitative Marketing and Economics (QME), Springer, vol. 2(1), pages 23-58, March.
    20. Keiichiro HONDA & Toshiyuki MATSUURA & Takeshi MIZUTA, 2017. "Welfare Assessment of Entry of New Retail Formats and Deregulation for Restriction on Large Retail Scale Stores in Japan," Economic Analysis, Economic and Social Research Institute (ESRI), vol. 194, pages 45-64, May.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:8798. 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: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.