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Estimating Substitution Patterns and Demand Curvature in Discrete-Choice Models of Product Differentiation

Cameron Birchall¹; Debashrita Mohapatra²; Frank Verboven³

¹ NERA and KU Leuven [email protected] · ² University of Connecticut [email protected] · ³ KU Leuven [email protected]

Abstract We extend BLP's aggregate discrete-choice model of product differentiation to create more flexibility in the price functional form. We apply a Box-Cox specification, which relaxes the typical unit demand assumption and creates flexibility on demand curvature. The model provides a unifying framework for mixed logit and mixed CES models, while remaining computationally tractable. We provide an illustrative application to the ready-to-eat cereals market. This shows that the cross-sectional relation between price elasticities and average prices per product is more in line with descriptive elasticity patterns, and that substitution between product pairs may be affected to some extent.

DOI

10.1162/rest_a_01463

Pages

1-40

Language

en

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