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Goals of paper. To estimate demand and cost parameters for a class of oligopolistic differentiated products marketsDemand side
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1. Berry-Levensohn-Pakes EMA (1995) Paper Notes ECON 721
3. Key features of the modeling framework Joint distribution of consumer characteristics and product attributes that determines preferences over the products marketed
Price taking on the part of the consumers
Nash equilibrium assumptions on the behavior of producers in an oligopolistic, differentiated product market (new car market)
4. Notation ? : characteristics of the individual making the choice
(x,?,p): product characteristics (observed, unobserved and price)
? represents for example style, prestige, reputation
U(?i,pj,xj, ?j ;? ) = utility if person i makes choice j
Choice 0 is the outside option of not purchasing any of the goods (cars)
5.
6. If M is the number of consumers in the market, then the vector of market demands is given by
8. iid case, with no unobserved product heterogeneity
9. Model not that appealing
subject to IIA criticism
Does not allow for interaction between consumer and product-level characteristics (no preference heterogeneity)
Substitution patterns only depend on the ds. Conditional on market shares, substitution patterns do not depend on attributes of the products
10. Therefore, generalize the model to allow consumers to have different preferences for different observable characteristics (random coefficients model)
12. Have information on aggregate distribution of consumers income, that they want to incorporate
Income distribution will come from CPS, not car data
Final specification (Cobb-Douglas form):
13. Price is expected to be correlated with unobserved product attributes ? need instruments
Will estimate demand system by Method of Moments, jointly with supply side
Quantity demanded
Use an inversion procedure of Berry (1994) to transform the observed quantity, price and characteristics data into a linear function of ?
14. Cost side Multiproduct firms 1
F
Each produces a subset of J possible products (car manufacturers produce multiple types of cars that may compete with each other)
Cost of producing a product is assumed to be independent of output levels and log linear in vector of cost characteristics (wj,?j)
15. Nash assumption Firm chooses prices that maximize profit-taking, given the attributes of its products and the prices and attributes of competitors products
Only price is endogenous to the model, attributes are not endogenous (do not decide what types of cars to bring to market)
16. FOC
18. instruments Assume
E(?j |z)=0
E(?j |z)=0
Instrument set consists of functions of the characteristics and cost shifters of all other products
19. Empirical Results Use data from the Automotive News Market Data Book
Number of cylinders, number of doors, weight, engine displacement, horsepower, length, width, wheelbase, EPA MPG, front wheel drive, automatic transmission, power steering, air conditioning