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  5. Empirical Issues in Consumer Choices and Industrial Organization
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Empirical Issues in Consumer Choices and Industrial Organization

Paper Session

Sunday, Jan. 3, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: Korea-America Economic Association
  • Chair: Kyoo il Kim, Michigan State University

Random Coefficients Logit Demand Estimation with Zero-Valued Market Shares

Jean-Pierre Dube
,
University of Chicago
Ali Hortacsu
,
University of Chicago
Joonhwi Joo
,
University of Texas-Dallas

Abstract

Although typically overlooked, many purchase datasets exhibit a high incidence of products with zero sales. We propose a new estimator for the Random-Coefficients Logit demand system for purchase datasets with zero-valued market shares. The identification of the demand parameters is based on a pairwise-differencing approach that constructs moment conditions based on differences in demand between pairs of products. The corresponding estimator corrects non-parametrically for the potential selection of the incidence of zeros on unobserved aspects of demand. The estimator also corrects for the potential endogeneity of marketing variables both in demand and in the selection propensities. Monte Carlo simulations show that our proposed estimator provides reliable small-sample inference both with and without selection-on-unobservables. In an empirical case study, the proposed estimator not only generates different demand estimates than approaches that ignore selection in the incidence of zero shares, it also generates better out-of-sample fit of observed retail contribution margins.

The Social Determinants of Deductible Choice: Evidence from the Netherlands

Benjamin Handel
,
University of California-Berkeley
Jonathan Kolstad
,
University of California-Berkeley
Thomas Minten
,
London School of Economics
Johannes Spinnewijn
,
London School of Economics

Abstract

Market provision of impure public goods such as insurance, retirement savings and education is common
and growing as policy makers seek to offer more choice and gain efficiencies. This approach induces an
important trade-off between improved surplus from matching individuals to products and misallocation due
to well documented choice errors in these markets. We study this trade-off in the health insurance market in the Netherlands, with a specific focus on misallocation and inequality. We characterize choice quality as a function of predicted health risk and leverage rich administrative data to study how it depends on individual human capital, socioeconomic status and social and information networks. We find that choice quality is low on average, with many people foregoing options that deliver substantive value. We also find a strong choice quality gradient with respect to key socioeconomic variables. Individuals with higher education levels and more analytic degrees or professions make markedly better decisions. Social influence on choices further increases inequality in decision making. Using panel variation in exposure to peers we find strong within firm, location and family impacts on choice quality. Finally, we use our estimates to model the consumer surplus effects of different counterfactual scenarios. While smart default policies could improve welfare substantially, including the choice of a high-deductible option delivers little welfare gain, especially for low-income individuals who make lower quality choices and are in worse health.

Geographic Expansion Mergers and FCC Spectrum Policy: Estimating a Matching Game with Externalities

Jeremy Fox
,
Rice University
Hector Perez-Saiz
,
Bank of Canada

Abstract

N/A

Demand Models with Endogenous Product Availability and Multiple Equilibria

Victor Aguirregabiria
,
University of Toronto
Alessandro Iaria
,
University of Bristol
Senay Sokullu
,
University of Bristol

Abstract

The estimation of demand models for differentiated products often relies on data from multiple geographic markets and time periods. The fact that firms do not offer some products in some markets generates a problem of endogenous product selection in demand estimation. The high dimension and non-additivity of the demand unobservables that enter firms' expected profit, and the potential multiplicity of equilibria in the entry game, make this selection problem challenging. In particular, standard two-step estimation methods to account for selection are inconsistent. We show the identification of demand parameters in a structural model of demand, price competition, and market entry that allows for a flexible specification of firms' information on demand and for a nonparametric distribution of demand unobservables. We propose a simple two-step estimator in the spirit of traditional methods to control for endogenous selection. We illustrate our method using simulated data and real data from the airline industry. We show that not accounting for endogenous product entry generates substantial biases that can be even larger than those from ignoring price endogeneity.
Discussant(s)
Giovanni Compiani
,
University of Chicago
Jihye Jeon
,
Boston University
Stefan Weiergraeber
,
Indiana University
Myongjin Kim
,
University of Oklahoma
JEL Classifications
  • L0 - General
  • D0 - General