What Happens When Demand is Estimated with a Misspecified Model?

31 Pages Posted: 2 Jan 2009

See all articles by Dongling Huang

Dongling Huang

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Christian Rojas

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics

Frank M. Bass (deceased)

Deceased

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Abstract

We conduct Monte Carlo experiments to investigate the biases of assuming a misspecified demand model. We study continuous models (linear, log-linear and AIDS), and discrete choice models (logit) in the context of differentiated products and aggregate data. Estimating demand with the wrong model yields varying degrees of bias in estimated elasticities, but the logit model can yield unbiased estimates for a certain size of the assumed market potential. Merger simulations confirm the key importance of market potential in logit estimation suggesting that a discrete choice model may be preferable even when the discreteness of the purchase decision is questionable.

Suggested Citation

Huang, Dongling and Rojas, Christian and Bass (deceased), Frank M., What Happens When Demand is Estimated with a Misspecified Model?. The Journal of Industrial Economics, Vol. 56, Issue 4, pp. 809-839, December 2008. Available at SSRN: https://ssrn.com/abstract=1319575 or http://dx.doi.org/10.1111/j.1467-6451.2008.00361.x

Dongling Huang (Contact Author)

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

Christian Rojas

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics ( email )

Stockbridge Hall
80 Campus Center Way
Amherst, MA 01003-9246
United States

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