Parallel Inverse Aggregate Demand Curves in Discrete Choice Models

Kory Kroft, René Leal Vizcaíno, Matthew Notowidigdo and Ting Wang

No 27437, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper highlights a previously-unnoticed property of commonly-used discrete choice models, which is that they feature parallel demand curves. Specifically, we show that in random utility models, inverse aggregate demand curves shift in parallel with respect to variety if and only if the random utility shocks follow the Gumbel distribution. Using results from Extreme Value Theory, we provide conditions for other distributions to generate parallel demands asymptotically, as the number of varieties increase. We establish these results in the benchmark case of symmetric products, illustrate them using numerical simulations and show that they hold in extended versions of the model with correlated tastes and asymmetric products. Lastly, we provide a “proof of concept” of parallel demands as an economic tool by showing how to use parallel demands to identify the change in consumer surplus from an exogenous change in product variety.

JEL-codes: D01 D11 L0 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-dcm and nep-upt
Note: IO LS PE
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Published as Kory Kroft & René Leal-Vizcaíno & Matthew J. Notowidigdo & Ting Wang, 2022. "Parallel inverse aggregate demand curves in discrete choice models," Economic Theory, vol 74(3), pages 923-946.

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Journal Article: Parallel inverse aggregate demand curves in discrete choice models (2022)
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