A Parsimonious Structural Model of Individual Demand for Multiple Related Goods

41 Pages Posted: 5 Feb 2013  

Andres Musalem

Universidad de Chile

Kenneth C. Wilbur

University of California, San Diego (UCSD) - Rady School of Management

Patricio Del Sol

Pontifical Catholic University of Chile

Date Written: February 4, 2013

Abstract

Nearly all theoretically motivated models of consumer demand for multiple goods assume additive separability in preferences, i.e. the consumption utility of each good x is independent of the quantity demanded of another good y. This is a strong restriction that makes the solution of the consumer’s utility maximization problem computationally tractable.

This paper shows that assuming preferences are weakly separable yields a similar simplification. It offers a theoretically founded model of consumer demand for continuous quantities of related goods. It also proposes a Bayesian estimation approach with a parsimonious parameterization that allows for corner solutions. It is the first structural model of individual demand for multiple goods which relaxes additive separability and does not suffer from a curse of dimensionality in the number of chosen goods.

The model is estimated using data on Chilean advertisers’ television audience purchases. We find that advertisers prefer spreading expenditures across time blocks more so than spreading expenditures across networks within a time block. The model nests additively separable preferences as a special case, but the data reject this case. We illustrate how a television network could use the model to assess the consequences of different advertisement pricing policies conditional on competitive response assumptions.

Keywords: advertising, Bayesian econometrics, demand estimation, quantity demand models, television

JEL Classification: C10, C11, C15, D12, l21, M30, M31, M37

Suggested Citation

Musalem, Andres and Wilbur, Kenneth C. and Del Sol, Patricio, A Parsimonious Structural Model of Individual Demand for Multiple Related Goods (February 4, 2013). Available at SSRN: https://ssrn.com/abstract=2211820 or http://dx.doi.org/10.2139/ssrn.2211820

Andres Musalem (Contact Author)

Universidad de Chile ( email )

Republica 701
Santiago
Chile

HOME PAGE: http://www.dii.uchile.cl/~amusalem

Kenneth C. Wilbur

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

HOME PAGE: http://kennethcwilbur.com

Patricio Del Sol

Pontifical Catholic University of Chile

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

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