Wang, Ao (2021) A BLP Demand Model of Product-Level Market Shares with Complementarity. Working Paper. Coventry, UK: University of Warwick. Department of Economics. Warwick economics research papers series (WERPS) (1351). (Unpublished)

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Abstract

Applied researchers most often estimate the demand for differentiated products assuming that at most one item can be purchased. Yet simultaneous multiple purchases are pervasive. Ignoring the interdependence among multiple purchases can lead to erroneous counterfactuals, in particular, because complementarities are ruled out. I consider the identification and estimation of a random coefficient discrete choice model of bundles, namely sets of products, when only product-level market shares are available. This last feature arises when only aggregate purchases of products, as opposed to individual purchases of bundles, are available, a very common phenomenon in practice. Following the classical approach with aggregate data, I consider a two-step method. First, using a novel inversion result in which demand can exhibit Hicksian complementarity, I recover the mean utilities of products from product-level market shares. Second, to infer the structural parameters from the mean utilities while dealing with price endogeneity, I use instrumental variables. I propose a practically useful GMM estimator whose implementation is straightforward, essentially as a standard BLP estimator. Finally, I estimate the demand for Ready-To-Eat (RTE) cereals and milk in the US. The demand estimates suggest that RTE cereals and milk are overall complementary and the synergy in consumption crucially depends on their characteristics. Ignoring such complementarities results in misleading counterfactuals.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HF Commerce Q Science > QA Mathematics
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Econometrics , Random fields, Estimation theory, Product differentiation -- Mathematical models, Economics -- Statistical methods, Distributed lags (Economics)
Series Name:	Warwick economics research papers series (WERPS)
Publisher:	University of Warwick. Department of Economics
Place of Publication:	Coventry, UK
ISSN:	0083-7350
Official Date:	13 May 2021
Dates:	Date Event 13 May 2021 Available
Number:	1351
Institution:	University of Warwick
Status:	Not Peer Reviewed
Publication Status:	Unpublished
Access rights to Published version:	Open Access (Creative Commons)

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