Estimating Demand for Differentiated Products with Zeroes in Market Share Data
57 Pages Posted: 17 Dec 2019 Last revised: 31 Jan 2020
Date Written: January 30, 2020
In this paper we introduce a new approach to estimating differentiated product demand systems that allows for products with zero sales in the data. Zeroes in demand are a common problem in product differentiated markets, but fall outside the scope of existing demand estimation techniques. Our solution to the zeroes problem is based on constructing bounds for the conditional expectation of the inverse demand. These bounds can be translated into moment inequalities that are shown to yield consistent and asymptotically normal point estimator for demand parameters under natural conditions for differentiated product markets. In Monte Carlo simulations, we demonstrate that the new approach works well even when the fraction of zeroes is as high as 95%. We apply our estimator to supermarket scanner data and find that correcting the bias caused by zeroes has important empirical implications, e.g., price elasticities become on the order of twice as large when zeroes are properly controlled.
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