Logit Demand Estimation Under Competitive Pricing Behavior: An Equilibrium Framework

David Besanko, Sachin Gupta and Dipak Jain
Additional contact information
David Besanko: Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois 60208
Sachin Gupta: Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois 60208
Dipak Jain: Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois 60208

Management Science, 1998, vol. 44, issue 11-Part-1, 1533-1547

Abstract: Discrete choice models of demand have typically been estimated assuming that prices are exogenous. Since unobservable (to the researcher) product attributes, such as coupon availability, may impact consumer utility as well as price setting by firms, we treat prices as endogenous. Specifically, prices are assumed to be the equilibrium outcomes of Nash competition among manufacturers and retailers. To empirically validate the assumptions, we estimate logit demand systems jointly with equilibrium pricing equations for two product categories using retail scanner data and cost data on factor prices. In each category, we find statistical evidence of price endogeneity. We also find that the estimates of the price response parameter and the brand-specific constants are generally biased downward when the endogeneity of prices is ignored. Our framework provides explicit estimates of the value created by a brand, i.e., the difference between consumers' willingness to pay for a brand and its cost of production. We develop theoretical propositions about the relationship between value creation and competitive advantage for logit demand systems and use our empirical results to illustrate how firms use alternative value creation strategies to accomplish competitive advantage.

Keywords: Demand Estimation; Logit; Endogeneity; Competitive Strategy (search for similar items in EconPapers)
Date: 1998
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (119)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.44.11.1533 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:44:y:1998:i:11-part-1:p:1533-1547

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().