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Estimation of random coefficients logit demand models with interactive fixed effects

Moon, HR; Shum, M; Weidner, M; (2014) Estimation of random coefficients logit demand models with interactive fixed effects. (Cemmap Working Paper CWP20/14). Cemmap

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Abstract

We extend the Berry, Levinsohn and Pakes (BLP, 1995) random coefficients discrete choice demand model, which underlies much recent empirical work in IO. We add interactive fixed effects in the form of a factor structure on the unobserved product characteristics. The interactive fixed effects can be arbitrarily correlated with the observed product characteristics (including price), which accommodates endogeneity and, at the same time, captures strong persistence in market shares across products and markets. We propose a two step least squares-minimum distance (LS-MD) procedure to calculate the estimator. Our estimator is easy to compute, and Monte Carlo simulations show that it performs well. We consider an empirical application to US automobile demand.

Type: Working / discussion paper
Title: Estimation of random coefficients logit demand models with interactive fixed effects
DOI: 10.1920/wp.cem.2014.2014
Publisher version: http://dx.medra.org/10.1920/wp.cem.2014.2014
Language: English
UCL classification: UCL > School of Arts and Social Sciences > Faculty of Social and Historical Sciences > Economics
URI: http://discovery.ucl.ac.uk/id/eprint/1343814
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