A Sequential Foundation for Two-Level Nested Logit

Davide Luparello

Papers from arXiv.org

Abstract: I show that the two-level nested logit model arises exactly from a sequential choice process in which group, subgroup, and product shocks are revealed in stages. The result extends to any number of levels and holds for any nesting parameters below one, without the bounds and ordering that random utility maximization requires. Parameter estimates that applied work discards for violating the standard ordering or the lower bound are consistent with sequential choice. The linear inversion and welfare formula hold. When the standard ordering fails, improving one product can raise a rival's market share in its subgroup, even with single-unit demand.

Date: 2026-10, Revised 2026-10
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