Estimation of Random Coefficients Logit Demand Models with Interactive Fixed Effects

57 Pages Posted: 31 Mar 2017

See all articles by Hyungsik Roger Moon

Hyungsik Roger Moon

University of Southern California - Department of Economics; USC Dornsife Institute for New Economic Thinking

Matthew Shum

California Institute of Technology

Martin Weidner

University College London - Department of Economics

Date Written: February 22, 2017

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.

Keywords: Discrete-Choice Demand Model, Interactive Fixed Effects, Factor Analysis, Panel Data, Random Utility Model.

JEL Classification: C23, C25.

Suggested Citation

Moon, Hyungsik Roger and Shum, Matthew and Weidner, Martin, Estimation of Random Coefficients Logit Demand Models with Interactive Fixed Effects (February 22, 2017). USC-INET Research Paper No. 17-10. Available at SSRN: https://ssrn.com/abstract=2943607 or http://dx.doi.org/10.2139/ssrn.2943607

Hyungsik Roger Moon (Contact Author)

University of Southern California - Department of Economics ( email )

KAP 300
Los Angeles, CA 90089-0253
United States
213-740-2108 (Phone)
213-740-8543 (Fax)

USC Dornsife Institute for New Economic Thinking ( email )

3620 S. Vermont Avenue, KAP 364F
Los Angeles, CA 90089-0253
United States

Matthew Shum

California Institute of Technology ( email )

Pasadena, CA 91125
United States

Martin Weidner

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

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