Estimating Models of Supply and Demand: Instruments and Covariance Restrictions

58 Pages Posted: 28 Aug 2017 Last revised: 31 Jan 2024

See all articles by Alexander MacKay

Alexander MacKay

Harvard University - Business School (HBS)

Nathan Miller

Georgetown University - McDonough School of Business

Date Written: January 29, 2024

Abstract

We consider the identification of empirical models of supply and demand with imperfect competition. We show that a restriction on the covariance between unobserved demand and cost shocks can resolve endogeneity and identify the price parameter. We demonstrate how to employ this approach in estimation, and we compare it to the method of instrumental variables. Our formal results also indicate that weaker covariance restrictions can bound the price parameter. We illustrate the covariance restriction approach with applications to ready-to-eat cereal, cement, and airlines.

Keywords: Identification, Demand Estimation, Covariance Restrictions, Instrumental Variables

JEL Classification: C13, C36, D12, D22, D40, L10

Suggested Citation

MacKay, Alexander and Miller, Nathan, Estimating Models of Supply and Demand: Instruments and Covariance Restrictions (January 29, 2024). Available at SSRN: https://ssrn.com/abstract=3025845 or http://dx.doi.org/10.2139/ssrn.3025845

Alexander MacKay

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Boston, MA 02163
United States

HOME PAGE: http://alexandermackay.org/

Nathan Miller (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
827
Abstract Views
4,868
Rank
56,012
PlumX Metrics