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A Hybrid Discrete Choice Model of Differentiated Product Demand with an Application to Personal Computers

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  • Minjae Song

    (University of Rochester)

Abstract

In this paper I construct a new discrete choice model of differentiated product demand that combines the pure characteristics demand model and the random coefficient logit demand model. In this hybrid model consumers are exposed to an idiosyncratic taste shock when they make a brand choice but free from it when they make a product choice within a brand. The simplest version of this model describes an oligopoly market where firms sell vertically differentiated products. Simulations show that the hybrid model is closer to the random coefficient logit model with respect to markup, while it is closer to the pure characteristics model with respect to welfare changes. These three models are applied to data on personal computers to estimate consumer demand. The hybrid model is better identified than the other two models such that coefficients are statistically significant and the willingness to pay for quality improvement is more reasonable. Markup and consumer welfare are also compared to evaluate implications of each model.

Suggested Citation

  • Minjae Song, 2008. "A Hybrid Discrete Choice Model of Differentiated Product Demand with an Application to Personal Computers," 2008 Meeting Papers 905, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:905
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    Cited by:

    1. Andrew Sweeting, 2010. "The effects of mergers on product positioning: evidence from the music radio industry," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 372-397, June.
    2. Anindya Ghose & Panagiotis G. Ipeirotis & Beibei Li, 2012. "Designing Ranking Systems for Hotels on Travel Search Engines by Mining User-Generated and Crowdsourced Content," Marketing Science, INFORMS, vol. 31(3), pages 493-520, May.

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