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Reliable estimation of random coefficient logit demand models

Author

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  • Brunner, Daniel
  • Heiss, Florian
  • Romahn, André
  • Weiser, Constantin

Abstract

The differentiated demand model of Berry, Levinsohn and Pakes (1995) is widely used in empirical economic research. Previous literature has demonstrated numerical instabilities of the corresponding GMM estimator that give a wide range of parameter estimates and economic implications depending on technical details such as the choice of optimization algorithm, starting values, and convergence criteria. We show that these instabilities are mainly driven by numerical approximation errors of the moment function which is not analytically available. With accurate approximation, the estimator is well-behaved. We also discuss approaches to mitigate the computational burden of accurate approximation and provide code for download.

Suggested Citation

  • Brunner, Daniel & Heiss, Florian & Romahn, André & Weiser, Constantin, 2017. "Reliable estimation of random coefficient logit demand models," DICE Discussion Papers 267, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  • Handle: RePEc:zbw:dicedp:267
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    References listed on IDEAS

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    7. Christopher Conlon & Jeff Gortmaker, 2020. "Best practices for differentiated products demand estimation with PyBLP," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 1108-1161, December.
    8. Bourreau, Marc & Sun, Yutec & Verboven, Frank, 2018. "Market Entry, Fighting Brands and Tacit Collusion: The Case of the French Mobile Telecommunications Market," CEPR Discussion Papers 12866, C.E.P.R. Discussion Papers.
    9. Doi, Naoshi, 2022. "A simple method to estimate discrete-type random coefficients logit models," International Journal of Industrial Organization, Elsevier, vol. 81(C).

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