Estimating Car Price Elasticity Using an Inverse Product Differentiation Logit Model

Introduction Estimating price elasticity in markets with elasticity estimates suggest that an increase in differentiated products is crucial for evaluating the price of BMW leads to an equal increase in the effect of innovations and economic the demand for Hyundai and Mercedes. [...] The After the seminal paper by Berry, Levinsohn, central idea of Berry’s model (1994) is to obtain the and Pakes (1995) in the context of automobile mean utility levels (across consumers) by inverting market demand, most empirical demand models the market share function in the first step and rely on consumer heterogeneity to specify a rich subsequently estimating the relationship between substitut. [...] Other than for the demand estimation for ready- This property of GEV-based models removes to-eat cereals in the original paper by Fosgerau, all the advantages of the use of product Monardo, and De Palma (2022), the potential of segmentation specification over consumer IPDL has not been explored in empirical studies. [...] The differences in that the absolute values of the own price elasticity the marginal utilities of the price between the base estimates for RCL and IPDL are much higher than model (i.e., without IV) and specifications 1 and 2 in those for NL and MNL, but the own price elasticity MNL indicate that addressing endogeneity is crucial estimates for IPDL and RCL are close to one another. [...] The rows of the cross-price elasticity matrix are A comparison of the estimates in specifications 1 the same in MNL due to IIA.