Identification and Estimation of Differentiated Products Models using Market Size and Cost Data

Byrne, D. P., Imai, S., Jain, N., Sarafidis, V. & Hirukawa, M. (2015). Identification and Estimation of Differentiated Products Models using Market Size and Cost Data (Report No. 15/05). London, UK: Department of Economics, City University London.

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Abstract

We propose a new methodology for estimating the demand and cost functions of differentiated products models when demand and cost data are available. The method deals with the endogeneity of prices to demand shocks and the endogeneity of outputs to cost shocks, by using variation in market size that does not need to be exogenous, and cost data. We establish nonparametric identification, consistency and asymptotic normality of our estimator. Using Monte-Carlo experiments, we show our method works well in contexts where instruments are correlated with demand and cost shocks, and where commonly-used instrumental variables estimators are biased and numerically unstable.

Item Type: Monograph (Discussion Paper)
Subjects: H Social Sciences > HB Economic Theory
Divisions: School of Social Sciences > Department of Economics > Department of Economics Discussion Paper Series
URI: http://openaccess.city.ac.uk/id/eprint/12381

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