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Identification and Estimation of Demand Models with Endogenous Product Entry and Exit

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  • Victor Aguirregabiria
  • Alessandro Iaria
  • Senay Sokullu

Abstract

This paper deals with the endogeneity of firms' entry and exit decisions in demand estimation. Product entry decisions lack a single crossing property in terms of demand unobservables, which causes the inconsistency of conventional methods dealing with selection. We present a novel and straightforward two-step approach to estimate demand while addressing endogenous product entry. In the first step, our method estimates a finite mixture model of product entry accommodating latent market types. In the second step, it estimates demand controlling for the propensity scores of all latent market types. We apply this approach to data from the airline industry.

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  • Victor Aguirregabiria & Alessandro Iaria & Senay Sokullu, 2023. "Identification and Estimation of Demand Models with Endogenous Product Entry and Exit," Papers 2308.14196, arXiv.org.
    • Handle: RePEc:arx:papers:2308.14196
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    1. Victor Aguirregabiria & Allan Collard-Wexler & Stephen P. Ryan, 2021. "Dynamic Games in Empirical Industrial Organization," Papers 2109.01725, arXiv.org, revised Sep 2021.
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    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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