SMU SOE Seminar (Aug 16, 2019): Identification and Estimation of Discrete Choice Demand Models when Observed and Unobserved Product Characteristics are Correlated

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TOPIC:

IDENTIFICATION AND ESTIMATION OF DISCRETE CHOICE DEMAND MODELS WHEN OBSERVED AND UNOBSERVED PRODUCT CHARACTERISTICS ARE CORRELATED

ABSTRACT The standard Berry, Levinsohn, and Pakes (1995) (BLP) approach to estimation of demand and supply parameters assumes that the product characteristic unobserved to the researcher but observed by consumers and producers is conditionally mean independent of all characteristics observed by the researcher. We extend BLP to allow all product characteristics to be endogenous, so the unobserved characteristic can be correlated with the other observed characteristics. We derive moment conditions based on the assumption that ﬁrms - when choosing product characteristics - are maximizing expected proﬁts given their beliefs at that time about preferences, costs, and competitors’ actions with respect to the product characteristics they choose. Following Hansen and Singleton (1982) we assume that the “mistake” in the choice of the amount of the characteristic that is revealed once all products are on the market is conditionally mean independent of anything the ﬁrm knows when it chooses its product characteristics. We develop an approximation to the optimal instruments and we also show how to use the standard BLP instruments. Using the original BLP automobile data we ﬁnd all parameters to be of the correct sign and to be much more precisely estimated. Our estimates imply observed and unobserved product characteristics are highly positively correlated, biasing demand elasticities upward signiﬁcantly, as our average estimated price elasticities double in absolute value and average markups fall by 50%. Click here to view the paper. Click here to view the CV.
		PRESENTER Boyoung Seo Indiana University
		RESEARCH FIELDS Industrial Organization Applied Microeconomics Econometrics
		DATE: 16 August 2019 (Friday)
		TIME: 4pm - 5.30pm
		VENUE: Meeting Room 5.1, Level 5 School of Economics Singapore Management University 90 Stamford Road Singapore 178903

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