Parallel inverse aggregate demand curves in discrete choice models

Kory Kroft, René Leal-Vizcaíno (), Matthew Notowidigdo and Ting Wang ()
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René Leal-Vizcaíno: Bank of Mexico
Ting Wang: Northwestern University

Economic Theory, 2022, vol. 74, issue 3, No 8, 923-946

Abstract: Abstract This paper highlights a previously unnoticed property of commonly-used discrete choice models, which is that they feature parallel demand curves. Specifically, we show that in additive random utility models, inverse aggregate demand curves shift in parallel with respect to variety if and only if the random utility shocks follow the Gumbel (Type 1 Extreme Value) distribution. Using results from Extreme Value Theory, we provide conditions for other distributions to generate parallel demands asymptotically, as the number of varieties increases. We establish these results in the benchmark case of symmetric products, illustrate them using numerical simulations and show that they hold in extended versions of the model with correlated tastes and asymmetric products. Lastly, we provide a “proof of concept” of parallel demands as an economic tool by showing how to use parallel demands to identify the change in consumer surplus from an exogenous change in product variety.

Keywords: Logit model; Discrete choice; Parallel demands; Product variety (search for similar items in EconPapers)
JEL-codes: D00 D01 D11 D6 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Parallel Inverse Aggregate Demand Curves in Discrete Choice Models (2020)
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DOI: 10.1007/s00199-021-01384-3

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