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Estimation of Dynamic Decision Models with Corner Solutions: A Model of Price and Inventory Decisions

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  • V. Aguirregabir

    (The University of Western Ontario)

Abstract

This paper proposes and applies a method of moments to estimate dynamic decision models with corner solutions. The method extends previous results by Hotz and Miller (1993) and Pakes (1994), and it allows for unobserved state variables affecting both the continuous choice (interior solution) and the discrete choice (interior solution / corner solution). The method is applied to estimate a model of price and inventory decisions using data of individual goods from a supermarket chain. The estimation shows that lump-sum ordering costs and lump-sum price adjustment costs are significant, but ordering costs are quantitatively more important. Numerical solutions of the model show that, in that context, the interaction between price and inventory decisions can explain the high frequency of nominal price reductions observed in the data.

Suggested Citation

  • V. Aguirregabir, 1996. "Estimation of Dynamic Decision Models with Corner Solutions: A Model of Price and Inventory Decisions," Econometrics 9603002, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpem:9603002
    Note: Type of Document - WordPerfect 6.0; prepared on IBM PC; to print on PostScript; pages: 49 ; figures: included
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    References listed on IDEAS

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    4. Newey, Whitney K., 1984. "A method of moments interpretation of sequential estimators," Economics Letters, Elsevier, vol. 14(2-3), pages 201-206.
    5. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-389, April.
    6. Rust, J., 1991. "Estimation of dynamic Structural Models: Problems and Prospects Part I : Discrete Decision Processes," Working papers 9106, Wisconsin Madison - Social Systems.
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    9. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
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    Cited by:

    1. N. Picard-Tortorici, 2000. "An Original Framework for Studying Dynamic Fertility Models," THEMA Working Papers 2000-05, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    2. Claus C Pörtner, 2010. "Sex Selective Abortions, Fertility and Birth Spacing," Working Papers UWEC-2010-04-R, University of Washington, Department of Economics, revised Aug 2010.
    3. Michael Leung & Junsen Zhang, 2008. "Gender preference, biased sex ratio, and parental investments in single-child households," Review of Economics of the Household, Springer, vol. 6(2), pages 91-110, June.
    4. Mukherjee, Diganta, 2002. "A new measure of gender bias," ISER Working Paper Series 2002-24, Institute for Social and Economic Research.

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    More about this item

    Keywords

    Dynamic decision models; Limited dependent variables; (S; s) price and inventory decisions; Lump-sum adjustment costs;
    All these keywords.

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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