Demand Estimation for Rationally Inattentive Consumers

Ruolei Zhu

Papers from arXiv.org

Abstract: We develop a rational-inattention BLP (RI-BLP) model for demand estimation from aggregate market shares, allowing for endogenous prices and unobserved preference heterogeneity. We establish conditions for uniqueness of market-share inversion and construct a simulated RI-BLP GMM estimator with instrumental-variable moments and market-share constraints. Under regularity and simulation-accuracy conditions, the estimator is consistent and asymptotically normal as the number of markets grows, with the number of products fixed. Monte Carlo experiments show accurate recovery of mean utility coefficients, with less precise estimates of dispersion parameters. In a canned-tuna application, RI-BLP and logit yield similar average own-price elasticities. Unlike logit, the fitted RI-BLP model implies that a price increase can reduce demand even for similar products and shift demand toward the outside option.

Date: 2026-10
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