IDEAS home Printed from https://ideas.repec.org/a/eee/econom/v228y2022i2p278-301.html
   My bibliography  Save this article

Instrument-free identification and estimation of differentiated products models using cost data

Author

Listed:
  • Byrne, David P.
  • Imai, Susumu
  • Jain, Neelam
  • Sarafidis, Vasilis

Abstract

We propose a new methodology for identifying and estimating demand in differentiated products models when demand and cost data are available. The method deals with the endogeneity of prices to demand shocks and the endogeneity of outputs to cost shocks by using cost data rather than instruments. Further, we allow for unobserved market size. Using Monte Carlo experiments, we show that our method works well in contexts where commonly used instruments are invalid. We also apply our method to the estimation of deposit demand in the US banking industry.

Suggested Citation

  • Byrne, David P. & Imai, Susumu & Jain, Neelam & Sarafidis, Vasilis, 2022. "Instrument-free identification and estimation of differentiated products models using cost data," Journal of Econometrics, Elsevier, vol. 228(2), pages 278-301.
  • Handle: RePEc:eee:econom:v:228:y:2022:i:2:p:278-301
    DOI: 10.1016/j.jeconom.2021.12.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304407622000021
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.jeconom.2021.12.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gautam Gowrisankaran & Marc Rysman, 2012. "Dynamics of Consumer Demand for New Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 120(6), pages 1173-1219.
    2. Jean‐Pierre Dubé & Jeremy T. Fox & Che‐Lin Su, 2012. "Improving the Numerical Performance of Static and Dynamic Aggregate Discrete Choice Random Coefficients Demand Estimation," Econometrica, Econometric Society, vol. 80(5), pages 2231-2267, September.
    3. Reynaert, Mathias & Verboven, Frank, 2014. "Improving the performance of random coefficients demand models: The role of optimal instruments," Journal of Econometrics, Elsevier, vol. 179(1), pages 83-98.
    4. Chenghuan Sean Chu, 2010. "The effect of satellite entry on cable television prices and product quality," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 730-764, December.
    5. Ying Fan, 2013. "Ownership Consolidation and Product Characteristics: A Study of the US Daily Newspaper Market," American Economic Review, American Economic Association, vol. 103(5), pages 1598-1628, August.
    6. Patrick Bayer & Fernando Ferreira & Robert McMillan, 2007. "A Unified Framework for Measuring Preferences for Schools and Neighborhoods," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 588-638, August.
    7. Fox, Jeremy T. & Kim, Kyoo il & Ryan, Stephen P. & Bajari, Patrick, 2012. "The random coefficients logit model is identified," Journal of Econometrics, Elsevier, vol. 166(2), pages 204-212.
    8. Steven T. Berry & Philip A. Haile, 2014. "Identification in Differentiated Products Markets Using Market Level Data," Econometrica, Econometric Society, vol. 82(5), pages 1749-1797, September.
    9. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
    10. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    11. Gregory S. Crawford & Ali Yurukoglu, 2012. "The Welfare Effects of Bundling in Multichannel Television Markets," American Economic Review, American Economic Association, vol. 102(2), pages 643-685, April.
    12. James Levinsohn & Steven Berry & Ariel Pakes, 1999. "Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy," American Economic Review, American Economic Association, vol. 89(3), pages 400-430, June.
    13. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    14. Shakeeb Khan & Elie Tamer, 2010. "Irregular Identification, Support Conditions, and Inverse Weight Estimation," Econometrica, Econometric Society, vol. 78(6), pages 2021-2042, November.
    15. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
    16. Dick, Astrid A., 2008. "Demand estimation and consumer welfare in the banking industry," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1661-1676, August.
    17. Howard Smith, 2004. "Supermarket Choice and Supermarket Competition in Market Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(1), pages 235-263.
    18. David P. Byrne, 2015. "Testing Models Of Differentiated Products Markets: Consolidation In The Cable Tv Industry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(3), pages 805-850, August.
    19. David Genesove & Wallace P. Mullin, 1998. "Testing Static Oligopoly Models: Conduct and Cost in the Sugar Industry, 1890-1914," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 355-377, Summer.
    20. Christopher R. Knittel & Konstantinos Metaxoglou, 2014. "Estimation of Random-Coefficient Demand Models: Two Empiricists' Perspective," The Review of Economics and Statistics, MIT Press, vol. 96(1), pages 34-59, March.
    21. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    22. Jean-Francois Houde, 2012. "Spatial Differentiation and Vertical Mergers in Retail Markets for Gasoline," American Economic Review, American Economic Association, vol. 102(5), pages 2147-2182, August.
    23. Bierens, Herman J., 2014. "Consistency And Asymptotic Normality Of Sieve Ml Estimators Under Low-Level Conditions," Econometric Theory, Cambridge University Press, vol. 30(5), pages 1021-1076, October.
    24. David P. Byrne, 2015. "Testing Models Of Differentiated Products Markets: Consolidation In The Cable Tv Industry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 805-850, August.
    25. Amil Petrin, 2002. "Quantifying the Benefits of New Products: The Case of the Minivan," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 705-729, August.
    26. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    27. Chen, Xiaohong, 2007. "Large Sample Sieve Estimation of Semi-Nonparametric Models," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 76, Elsevier.
    28. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    29. Kutlu, Levent & Sickles, Robin C., 2012. "Estimation of market power in the presence of firm level inefficiencies," Journal of Econometrics, Elsevier, vol. 168(1), pages 141-155.
    30. Chao Fu & Kenneth I Wolpin, 2018. "Structural Estimation of a Becker-Ehrlich Equilibrium Model of Crime: Allocating Police Across Cities to Reduce Crime," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2097-2138.
    31. Gollop, Frank M & Roberts, Mark J, 1983. "Environmental Regulations and Productivity Growth: The Case of Fossil-Fueled Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 654-674, August.
    32. Matthew Gentzkow & Jesse M. Shapiro, 2010. "What Drives Media Slant? Evidence From U.S. Daily Newspapers," Econometrica, Econometric Society, vol. 78(1), pages 35-71, January.
    33. Karen Clay & Werner Troesken, 2003. "Further Tests of Static Oligopoly Models: Whiskey, 1882–1898," Journal of Industrial Economics, Wiley Blackwell, vol. 51(2), pages 151-166, June.
    34. Christensen, Laurits R & Greene, William H, 1976. "Economies of Scale in U.S. Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 655-676, August.
    35. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David P. Byrne & Susumu Imai & Neelam Jain & Vasilis Sarafidis & Masayuki Hirukawa, 2019. "Identification and Estimation of Differentiated Products Models," Monash Econometrics and Business Statistics Working Papers 33/19, Monash University, Department of Econometrics and Business Statistics.
    2. David P. Byrne & Susumu Imai & Vasilis Sarafidis & Masayuki Hirukawa, 2015. "Instrument-free Identification and Estimation of Differentiated Products Models," Working Paper Series 26, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Byrne, D. P. & Imai, S. & Jain, N. & Sarafidis, V. & Hirukawa, M., 2020. "Identification and Estimation of Differentiated Products Models using Cost Data," Working Papers 15/05, Department of Economics, City University London.
    4. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics, Canadian Economics Association, vol. 50(5), pages 1445-1488, December.
    5. Steven T. Berry & Philip A. Haile, 2021. "Foundations of Demand Estimation," Cowles Foundation Discussion Papers 2301, Cowles Foundation for Research in Economics, Yale University.
    6. Amit Gandhi & Jean-François Houde, 2019. "Measuring Substitution Patterns in Differentiated-Products Industries," NBER Working Papers 26375, National Bureau of Economic Research, Inc.
    7. David P. Byrne, 2015. "Testing Models Of Differentiated Products Markets: Consolidation In The Cable Tv Industry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(3), pages 805-850, August.
    8. Christopher Conlon & Jeff Gortmaker, 2020. "Best practices for differentiated products demand estimation with PyBLP," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 1108-1161, December.
    9. Wang, Ao, 2021. "A BLP Demand Model of Product-Level Market Shares with Complementarity," The Warwick Economics Research Paper Series (TWERPS) 1351, University of Warwick, Department of Economics.
    10. Bokhari, Farasat A.S. & Mariuzzo, Franco, 2018. "Demand estimation and merger simulations for drugs: Logits v. AIDS," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 653-685.
    11. Matthew Backus & Christopher Conlon & Michael Sinkinson, 2021. "Common Ownership and Competition in the Ready-to-Eat Cereal Industry," NBER Working Papers 28350, National Bureau of Economic Research, Inc.
    12. Lu, Zhentong & Shi, Xiaoxia & Tao, Jing, 2023. "Semi-nonparametric estimation of random coefficients logit model for aggregate demand," Journal of Econometrics, Elsevier, vol. 235(2), pages 2245-2265.
    13. Wang, Ao, 2023. "Sieve BLP: A semi-nonparametric model of demand for differentiated products," Journal of Econometrics, Elsevier, vol. 235(2), pages 325-351.
    14. Ketz, Philipp, 2019. "On asymptotic size distortions in the random coefficients logit model," Journal of Econometrics, Elsevier, vol. 212(2), pages 413-432.
    15. Laura Grigolon, 2021. "Blurred boundaries: A flexible approach for segmentation applied to the car market," Quantitative Economics, Econometric Society, vol. 12(4), pages 1273-1305, November.
    16. Moon, Hyungsik Roger & Shum, Matthew & Weidner, Martin, 2018. "Estimation of random coefficients logit demand models with interactive fixed effects," Journal of Econometrics, Elsevier, vol. 206(2), pages 613-644.
    17. Steven T. Berry & Philip A. Haile, 2014. "Identification in Differentiated Products Markets Using Market Level Data," Econometrica, Econometric Society, vol. 82, pages 1749-1797, September.
    18. Miravete, Eugenio J. & Seim, Katja & Thurk, Jeff, 2023. "Pass-through and tax incidence in differentiated product markets," International Journal of Industrial Organization, Elsevier, vol. 90(C).
    19. Iaria, Alessandro & ,, 2020. "Identification and Estimation of Demand for Bundles," CEPR Discussion Papers 14363, C.E.P.R. Discussion Papers.
    20. Daniel Chaves, 2022. "Market Power, Taxation and Product Variety in the Brazilian Automobile Industry," University of Western Ontario, Departmental Research Report Series 20227, University of Western Ontario, Department of Economics.

    More about this item

    Keywords

    Differentiated products oligopoly; Instruments; Identification; Cost data;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:econom:v:228:y:2022:i:2:p:278-301. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jeconom .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.