Estimating Discrete-Choice Models of Product Differentiation

TLDR

The study addresses supply‑and‑demand analysis in oligopoly markets with differentiated products. The paper proposes estimating discrete‑choice models by inverting the market‑share equation to recover mean utilities for each product. The authors model demand with a discrete‑choice framework, allow price–demand correlation, and estimate the model using instrumental‑variables techniques by inverting the market‑share equation.

Abstract

This article considers the problem of supply-and-demand analysis on a cross section of oligopoly markets with differentiated products. The primary methodology is to assume that demand can be described by a discrete-choice model and that prices are endogenously determined by price-setting firms. In contrast to some previous empirical work, the techniques explicitly allow for the possibility that prices are correlated with unobserved demand factors in the cross section of markets. The article proposes estimation by inverting the market-share equation to find the implied mean levels of utility for each good. This method allows for estimation by traditional instrumental variables techniques.