Demand Estimation with Variable Choice Sets: A Likelihood Correction for Nested Logit

Matthew J. Baker and Lisa M. George

Papers from arXiv.org

Abstract: We derive the exact likelihood of the Berry (1994) share-form nested logit and show it contains a Jacobian term that depends on nest size and the nesting parameter. Omitting the term biases within-nest substitution estimates wherever choice sets vary across markets. Commonly-used count instruments for the within-nest share fail exclusion when product counts enter demand directly. The corrected likelihood identifies substitution without them, making crowding estimable. We apply the estimator to Medicare Advantage plan proliferation after 2019 elimination of the ``meaningful difference'' requirement. Estimates indicate plan proliferation raised consumer surplus in most markets, but ignoring crowding overstates the gains.

Date: 2026-09
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