Identification and Estimation of Differentiated Products Models

David Byrne, Susumu Imai (), Neelam Jain (), Vasilis Sarafidis and Masayuki Hirukawa ()

No 33/19, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: We propose a new methodology for estimating demand and cost functions of differentiated products models when demand and cost data are available. The method deals with the endogeneity of prices to demand shocks and the endogeneity of outputs to cost shocks by using cost data. We establish identification, consistency and asymptotic normality of our two-step Sieve Nonlinear Least Squares (SNLLS) estimator for the commonly used logit and BLP demand function specification. Using Monte-Carlo experiments, we show that our method works well in contexts where commonly used instruments are correlated with demand and cost shocks and thus biased. We also apply our method to the estimation of deposit demand in the US banking industry.

Keywords: differentiated goods oligopoly; instruments; identification; cost data. (search for similar items in EconPapers)
JEL-codes: C13 C14 L13 L41 (search for similar items in EconPapers)
Pages: 102
Date: 2019
New Economics Papers: this item is included in nep-com and nep-ore
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