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Demand Estimation with Infrequent Purchases and Small Market Sizes

Author

Listed:
  • Ali Hortacsu

    (University of Chicago and NBER)

  • Olivia R. Natan

    (University of California, Berkeley)

  • Hayden Parsley

    (University of Texas, Austin)

  • Timothy Schwieg

    (University of Chicago, Booth)

  • Kevin R. Williams

    (Cowles Foundation, Yale University)

Abstract

We propose a demand estimation method that allows for a large number of zero sale observations, rich unobserved heterogeneity, and endogenous prices. We do so by modeling small market sizes through Poisson arrivals. Each of these arriving consumers solves a standard discrete choice problem. We present a Bayesian IV estimation approach that addresses sampling error in product shares and scales well to rich data environments. The data requirements are traditional market-level data as well as a measure of market sizes or consumer arrivals. After presenting simulation studies, we demonstrate the method in an empirical application of air travel demand.

Suggested Citation

  • Ali Hortacsu & Olivia R. Natan & Hayden Parsley & Timothy Schwieg & Kevin R. Williams, 2021. "Demand Estimation with Infrequent Purchases and Small Market Sizes," Cowles Foundation Discussion Papers 2313R2, Cowles Foundation for Research in Economics, Yale University, revised Jun 2023.
    • Handle: RePEc:cwl:cwldpp:2313r2
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    File URL: https://cowles.yale.edu/sites/default/files/2023-07/d2313r2.pdf
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    More about this item

    Keywords

    Discrete Choice Modeling; Demand Estimation; Zero-Sale Observations; Bayesian Methods; Airline Markets.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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