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Nested Logit or Random Coefficients Logit? A Comparison of Alternative Discrete Choice Models of Product Differentiation

Laura Grigolon () and Frank Verboven

The Review of Economics and Statistics, 2014, vol. 96, issue 5, 916-935

Abstract: We propose a random coefficients nested logit (RCNL) model to compare the tractable nested logit (NL) model with the more complex random coefficients logit (RC) model. After a simulation study, we use data on the European automobile market. Both the NL and RC models are rejected against the RCNL model. The RC model results in different substitution patterns and a wider market definition than the NL and RCNL models. Nevertheless, the predicted price effects from mergers are robust across models. Our findings stress the importance of accounting for discrete sources of market segmentation not captured by continuous product characteristics.

Keywords: nested logit model; random coefficients next logit model (search for similar items in EconPapers)
JEL-codes: C13 C31 L62 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Nested logit or random coefficients logit? A comparison of alternative discrete choice models of product differentiation (2011) Downloads
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