Estimating Substitution Patterns and Demand Curvature in Discrete-Choice Models of Product Differentiation

Cameron Birchall and Frank Verboven

No 16981, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We extend BLP's aggregate discrete-choice model of product differentiation to create more flexibility in the price functional form. We apply a Box-Cox specification, which relaxes the typical unit demand assumption and creates flexibility on demand curvature. The model provides a unifying framework for mixed logit and mixed CES models. Our illustrative application to the ready-to-eat cereals market shows that the cross-sectional relation between price elasticities and average prices per product is more in line with descriptive elasticity patterns. Furthermore, it suggests lower cross-price elasticities between similarly priced products than in more restrictive specifications.

Keywords: Blp; Demand curvature; Mixed logit; Mixed ces (search for similar items in EconPapers)
Date: 2022-01
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