Measuring Substitution Patterns in Diﬀerentiated-Products Industries

Amit Gandhi · Jean‐François Houde

161 citations0/0 files storedNational Bureau of Economic Research

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Abstract

We study the estimation of substitution patterns within the discrete choice framework developed by Berry (1994) and Berry, Levinsohn, and Pakes (1995).Our objective is to demonstrate the consequences of using weak instruments in this non-linear GMM context, and propose a new class of instruments that are designed to avoid weak IV and can be used to estimate a large family of models with aggregate data.We argue that strong instruments should reflect the (exogenous) degree of differentiation of each product in a market (Differentiation IVs), and provide a series of examples to illustrate the performance of simple instrument functions.

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References

1995Automobile Prices in Market Equilibrium 1994Estimating Discrete-Choice Models of Product Differentiation 1984Specification Tests for the Multinomial Logit Model 2000A Practitioner's Guide to Estimation of Random-Coefficients Logit Models of Demand 1987Competition and Collusion in the American Automobile Industry: The 1955 Price War 2002Spatial Price Competition: A Semiparametric Approach 2006Spatial competition in retail markets: movie theaters 1999Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy

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