Structural Models of Complementary Choices

27 Pages Posted: 13 Aug 2014

See all articles by Steven Berry

Steven Berry

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Ahmed Khwaja

University of Cambridge - Judge Business School; Yale School of Management; Yale University - Cowles Foundation

Vineet Kumar

Harvard Business School

Andres Musalem

Universidad de Chile

Kenneth C. Wilbur

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

Greg M. Allenby

Ohio State University (OSU) - Department of Marketing and Logistics

Bharat N. Anand

Harvard University - Strategy Unit

Pradeep K. Chintagunta

University of Chicago

W. Michael Hanemann

University of California, Berkeley - The Richard & Rhoda Goldman School of Public Policy

Przemyslaw Jeziorski

University of California, Berkeley - Haas School of Business

Angelo Mele

Johns Hopkins University - Carey Business School

Date Written: March 31, 2014

Abstract

Complementary choices are important and pervasive yet occasionally elusive. Single consumers make complementary choices in purchase decisions (e.g. chips and salsa), product interoperabilities (smartphones and networks), and dynamic decisions (current exercise and future healthcare consumption). Multiple consumers make complementary choices when they interact in strategic games or form networks. Firms make complementary choices when determining production inputs, entering related markets, and strategic mergers.

The structural empirical literature has recently started to address the difficult problem of how to model complementary choices. This new work contrasts with traditional approaches such as discrete choice models, wherein all choices are mutually exclusive.

A naïve approach to modeling complementary choices is to include all possible bundles of choices in the choice set. However, for any given set of options, the set of all possible subsets is exponentially larger, and often too large to feasibly estimate. Second, specific models of complementarities are needed to ensure desirable equilibrium properties in games among agents (e.g., existence, uniqueness or multiplicity). Third, models of complementarities are often required to evaluate counterfactuals, such as predicting demand for bundles of complementary products that have not previously been offered.

We review the literature selectively, summarizing the state of the art and identifying promising directions for future work. We begin with complementary choices made by consumers, and then examine complementary choices made by firms.

Keywords: structural models; econometrics; complements

Suggested Citation

Berry, Steven T. and Khwaja, Ahmed and Kumar, Vineet and Musalem, Andres and Wilbur, Kenneth C. and Allenby, Greg M. and Anand, Bharat N. and Chintagunta, Pradeep K. and Hanemann, Michael and Jeziorski, Przemyslaw and Mele, Angelo, Structural Models of Complementary Choices (March 31, 2014). Marketing Letters, Forthcoming; Fisher College of Business Working Paper No. RP 2014-05-02. Available at SSRN: https://ssrn.com/abstract=2478886 or http://dx.doi.org/10.2139/ssrn.2478886

Steven T. Berry

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8264
United States
203-432-3556 (Phone)
203-432-6323 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Ahmed Khwaja

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Vineet Kumar (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 179
Boston, MA 02163
United States

Andres Musalem

Universidad de Chile ( email )

Beauchef 851
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

Greg M. Allenby

Ohio State University (OSU) - Department of Marketing and Logistics ( email )

Fisher Hall 524
2100 Neil Ave
Columbus, OH 43210
United States

Bharat N. Anand

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617 495-5082 (Phone)
617 495-0355 (Fax)

Pradeep K. Chintagunta

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

Michael Hanemann

University of California, Berkeley - The Richard & Rhoda Goldman School of Public Policy ( email )

School of Natural Resources
327 Giannini Hall
Berkeley, CA 94720
United States
510-642-2670 (Phone)
510-642-3345 (Fax)

Przemyslaw Jeziorski

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Angelo Mele

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://www.meleangelo.com

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