Elasticity and Curvature of Discrete Choice Demand Models

Eugenio Miravete, Katja Seim and Jeff Thurk

No 18310, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We explore the determinants of demand curvature and pass-through in aggregate, unit-demand, discrete choice mixed logit models. Accurate pass-through estimates are at the heart of analyses of mergers, taxation, tariffs, cost shocks, and exchange rates when firms have market power. To overcome the inherent curvature restrictions in multinomial logit models, we highlight the need to incorporate heterogeneity in both price responsiveness and preferences for product characteristics. A flexible and parsimonious specification of preference heterogeneity expands the feasible range of elasticity-curvature pairs up to those of the constant elasticity of substitution (CES) demand. We demonstrate empirically significant differences in estimated elasticity and curvature compared to simpler models and highlight their economic relevance in the context of price discrimination.

Date: 2023-07
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