Instrument-free identification and estimation of differentiated products models using cost data

David P. Byrne, Susumu Imai, Neelam Jain () and Vasilis Sarafidis

Journal of Econometrics, 2022, vol. 228, issue 2, 278-301

Abstract: We propose a new methodology for identifying and estimating demand in 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 rather than instruments. Further, we allow for unobserved market size. Using Monte Carlo experiments, we show that our method works well in contexts where commonly used instruments are invalid. We also apply our method to the estimation of deposit demand in the US banking industry.

Keywords: Differentiated products oligopoly; Instruments; Identification; Cost data (search for similar items in EconPapers)
JEL-codes: C13 C18 L13 L41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:228:y:2022:i:2:p:278-301

DOI: 10.1016/j.jeconom.2021.12.006

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