Tests for Price Endogeneity in Differentiated Product Models

Kyoo il Kim () and Amil Petrin

No 19011, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop simple tests for endogenous prices arising from omitted demand factors in discrete choice models. Our approach only requires one to locate testing proxies that have some correlation with the omitted factors when prices are endogenous. We use the difference between prices and their predicted values given observed demand and supply factors. If prices are exogenous, these proxies should not explain demand given prices and other explanatory variables. We reject exogeneity if these proxies enter significantly in utility as additional explanatory variables. The tests are easy to implement as we show with several Monte Carlos and discuss for three recent demand applications.

JEL-codes: C3 L0 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-com, nep-dcm and nep-ecm
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Published as Kim Kyoo il & Petrin Amil, 2015. "Tests for Price Endogeneity in Differentiated Product Models," Journal of Econometric Methods, De Gruyter, vol. 4(1), pages 23, January.

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