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Estimation of Random-Coefficient Demand Models: Two Empiricists' Perspective

Christopher R. Knittel1; Konstantinos Metaxoglou2

1 Sloan School of Management, MIT and NBER · 2 Bates White LLC

The Review of Economics and Statistics 2014 open access

We document the numerical challenges we experienced estimating random-coefficient demand models as in Berry, Levinsohn, and Pakes (1995) using two well-known data sets and a thorough optimization design. The optimization algorithms often converge at points where the first- and second-order optimality conditions fail. There are also cases of convergence at local optima. On convergence, the variation in the values of the parameter estimates translates into variation in the models' economic predictions. Price elasticities and changes in consumer and producer welfare following hypothetical merger exercises vary at least by a factor of 2 and up to a factor of 5.

DOI
10.1162/rest_a_00394
Volume
96 (1)
Pages
34-59
Language
en
Export
BibTeX
Sources
crossref openalex