Discrete Choice Models as Structural Models of Demand: Some Economic Implications of Common Approaches
October 2001 We derive some theoretical economic properties of standard discrete choice econometric models that we believe are undesirable if the models are to be used as structural models of demand. We show that many standard models have the following properties: as the number of products increases, the compensating variation for removing all of the inside goods tends to infinity, all firms in Bertrand-Nash pricing game have markups that are bounded away from zero, and for each good there is always some consumer that is willing to pay an arbitrarily large sum for the good. These undesirable properties may lead to incorrect conclusions about many policies of interest, including calculation of price indexes, the benefits of new goods, and the welfare loss due to mergers. We demonstrate that these undesirable properties hold not only in the logit model, but also in all random utility models with the following three general properties: 1) the model includes an additive error term whose conditional support is unbounded, 2) the deterministic part of the utility function satisfies standard continuity and monotonicity conditions, and 3) the hazard rate of the error distribution is bounded above. One approach to avoiding these undesirable properties is to weaken these three restrictions. However, we also show that random utility models are not in general non-parametrically identified from market shares or individual level choice data. Our findings support the use of alternative structural approaches that have better economic properties, such as those of Bajari and Benkard (2001) and Berry and Pakes (2000). Working Papers Index
|Date of creation:||Oct 2001|
|Date of revision:|
|Contact details of provider:|| Postal: Ralph Landau Economics Building, Stanford, CA 94305-6072|
Web page: http://www-econ.stanford.edu/econ/workp/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nevo, Aviv, 2001.
"Measuring Market Power in the Ready-to-Eat Cereal Industry,"
Econometric Society, vol. 69(2), pages 307-42, March.
- Nevo, Aviv, 1998. "Measuring Market Power in the Ready-To-Eat Cereal Industry," Food Marketing Policy Center Research Reports 037, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
- Aviv Nevo, 2003. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Microeconomics 0303006, EconWPA.
- Aviv Nevo, 1998. "Measuring Market Power in the Ready-to-Eat Cereal Industry," NBER Working Papers 6387, National Bureau of Economic Research, Inc.
- Nevo, Aviv, 1999. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Competition Policy Center, Working Paper Series qt7cm5p858, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
- Nevo, Aviv, 1998. "Measuring Market Power in the Ready-To-Eat Cereal Industry," Research Reports 25164, University of Connecticut, Food Marketing Policy Center.
- Peter Davis, 2006. "Spatial competition in retail markets: movie theaters," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 964-982, December.
- Caplin, Andrew & Nalebuff, Barry, 1991.
"Aggregation and Imperfect Competition: On the Existence of Equilibrium,"
Econometric Society, vol. 59(1), pages 25-59, January.
- Andrew Caplin & Barry Nalebuff, 1990. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Cowles Foundation Discussion Papers 937, Cowles Foundation for Research in Economics, Yale University.
- 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.
- Daniel A. Ackerberg & Marc Rysman, 2005. "Unobserved Product Differentiation in Discrete-Choice Models: Estimating Price Elasticities and Welfare Effects," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 771-788, Winter.
- Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
- Igal Hendel, 1999. "Estimating Multiple-Discrete Choice Models: An Application to Computerization Returns," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 423-446.
When requesting a correction, please mention this item's handle: RePEc:wop:stanec:01016. 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: (Thomas Krichel)
If references are entirely missing, you can add them using this form.