An overlapping choice set model of automotive price elasticities

This paper focusses on choice models in which individuals (a) determine which of the many available products are worthy of detailed consideration. We refer to the resulting smaller set of products as the individual's choice set; (b) choose among products in the choice set using a fairly simple logit model. The nested logit model (McFadden, 1978; 1983) is one common example of this model in which choice sets are mutually exclusive and collectively exhaustive. Unfortunately, there is strong empirical evidence suggesting that automobile buyers have overlapping choice sets. Thus, some buyers will consider both small and medium-sized cars whereas other buyers will consider both large and medium-sized cars. Hence, the nested logit model appears to unrealistically limit the allowable patterns of interproduct similarity. To avoid these problems, I allow choice sets to overlap but will restrict all choice sets to include the same number of products. As I describe, the resulting model is estimable with data on individual first and second choice preferences. We illustrate the model's utility by deducing demand-price elasticities for the automotive market.