Nonparametric Identification of Demand without Exogenous Product Characteristics

Kirill Borusyak, Jiafeng Chen, Peter Hull and Lihua Lei

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Abstract: We study the identification of differentiated product demand with exogenous supply-side instruments, allowing product characteristics to be endogenous. Past analyses have argued that exogenous characteristic-based instruments are essentially necessary given a sufficiently flexible demand model with a suitable index restriction. We show, however, that price counterfactuals are nonparametrically identified by recentered instruments -- which combine exogenous shocks to prices with endogenous product characteristics -- under a weaker index restriction and a new condition we term faithfulness. We argue that faithfulness, like the usual completeness condition for nonparametric identification with instruments, can be viewed as a technical requirement on the richness of identifying variation rather than a substantive economic restriction, and we show that it holds under a variety of non-nested conditions on either price-setting or the index.

Date: 2025-12
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