Nested Logit or Random Coefficients Logit? A Comparison of Alternative Discrete Choice Models of Product Differentiation

43 Pages Posted: 29 Sep 2011  

Laura Grigolon

KU Leuven - Faculty of Business and Economics (FEB)

Frank Verboven

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: September 2011

Abstract

We start from an aggregate random coefficients nested logit (RCNL) model to provide a systematic comparison between the tractable logit and nested logit (NL) models with the computationally more complex random coefficients logit (RC) model. We first use simulated data to assess possible parameter biases when the true model is a RCNL model. We then use data on the automobile market to estimate the different models, and as an illustration assess what they imply for competition policy analysis. As expected, the simple logit model is rejected against the NL and RC model, but both of these models are in turn rejected against the more general RCNL model. While the NL and RC models result in quite different substitution patterns, they give robust policy conclusions on the predicted price effects from mergers. In contrast, the conclusions for market definition are not robust across different demand models. In general, our findings suggest that it is important to account for sources of market segmentation that are not captured by continuous characteristics in the RC model.

Keywords: automobile market, competition policy, discrete choice, nested logit, random coefficients logit

JEL Classification: L00, L40, L62

Suggested Citation

Grigolon, Laura and Verboven, Frank, Nested Logit or Random Coefficients Logit? A Comparison of Alternative Discrete Choice Models of Product Differentiation (September 2011). CEPR Discussion Paper No. DP8584. Available at SSRN: https://ssrn.com/abstract=1935260

Laura Grigolon (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

HOME PAGE: http://www.econ.kuleuven.be/public/N07082/

Frank Verboven

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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