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Estimation of random coefficients logit demand models with interactive fixed effects

Moon, HR; Shum, M; Weidner, M; (2018) Estimation of random coefficients logit demand models with interactive fixed effects. Journal of Econometrics , 206 (2) pp. 613-644. 10.1016/j.jeconom.2018.06.016. Green open access

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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 illustration to US automobile demand.

Type: Article
Title: Estimation of random coefficients logit demand models with interactive fixed effects
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.jeconom.2018.06.016
Publisher version: https://doi.org/10.1016/j.jeconom.2018.06.016
Language: English
Additional information: Copyright © 2018 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
Keywords: Discrete-choice demand model, interactive fixed effects, factor analysis, panel data, random utility model.
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/1542300
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