State-Dependent Demand Estimation with Initial Conditions Correction

36 Pages Posted: 24 Aug 2019

See all articles by Andrey Simonov

Andrey Simonov

Columbia University - Columbia Business School

Jean-Pierre Dubé

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Günter J. Hitsch

University of Chicago - Booth School of Business

Peter E. Rossi

University of California, Los Angeles (UCLA) - Anderson School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: August 5, 2019

Abstract

We analyze the initial conditions bias in the estimation of brand choice models with structural state dependence. Using a combination of Monte Carlo simulations and empirical case studies of shopping panels, we show that popular, simple solutions that mis-specify the initial conditions are likely to lead to bias even in relatively long panel datasets. The magnitude of the bias in the state dependence parameter can be as large as a factor of 2 to 2.5. We propose a solution to the initial conditions problem that samples the initial states as auxiliary variables in an MCMC procedure. The approach assumes that the joint distribution of prices and consumer choices, and hence the distribution of initial states, is in equilibrium. This assumption is plausible for the mature consumer packaged goods products used in this and the majority of prior empirical applications. In Monte Carlo simulations, we show that the approach recovers the true parameter values even in relatively short panels. Finally, we propose a diagnostic tool that uses common, biased approaches to bound the values of the state dependence and construct a computationally light test for state dependence.

Keywords: initial conditions, state dependence, consumer demand, brand choice

JEL Classification: D11, D12, L66, M3

Suggested Citation

Simonov, Andrey and Dube, Jean-Pierre H. and Hitsch, Guenter J. and Rossi, Peter E., State-Dependent Demand Estimation with Initial Conditions Correction (August 5, 2019). Available at SSRN: https://ssrn.com/abstract=3432450 or http://dx.doi.org/10.2139/ssrn.3432450

Andrey Simonov

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Jean-Pierre H. Dube (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://gsb.uchicago.edu/fac/jean-pierre.dube

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Guenter J. Hitsch

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Peter E. Rossi

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
773-294-8616 (Phone)

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