Random-Coefficients Logit Demand Estimation with Zero-Valued Market Shares

44 Pages Posted: 10 Mar 2020

See all articles by Jean-Pierre Dubé

Jean-Pierre Dubé

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

Ali Hortaçsu

University of Chicago

Joonhwi Joo

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: February 15, 2020

Abstract

Although typically overlooked, many purchase datasets exhibit a high incidence of products with zero sales. We propose a new estimator for the Random-Coefficients Logit demand system for purchase datasets with zero-valued market shares. The identification of the demand parameters is based on a pairwise-differencing approach that constructs moment conditions based on differences in demand between pairs of products. The corresponding estimator corrects non-parametrically for the potential selection of the incidence of zeros on unobserved aspects of demand. The estimator also corrects for the potential endogeneity of marketing variables both in demand and in the selection propensities. Monte Carlo simulations show that our proposed estimator provides reliable small-sample inference both with and without selection-on-unobservables. In an empirical case study, the proposed estimator not only generates different demand estimates than approaches that ignore selection in the incidence of zero shares, it also generates better out-of-sample fit of observed retail contribution margins.

Keywords: consumer demand, pairwise-difference estimation, endogeneity, consideration

JEL Classification: C1, C5, C6, D11, L00, M3

Suggested Citation

Dube, Jean-Pierre H. and Hortaçsu, Ali and Joo, Joonhwi, Random-Coefficients Logit Demand Estimation with Zero-Valued Market Shares (February 15, 2020). Available at SSRN: https://ssrn.com/abstract=3539492 or http://dx.doi.org/10.2139/ssrn.3539492

Jean-Pierre H. Dube (Contact Author)

University of Chicago - Booth School of Business ( email )

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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

Ali Hortaçsu

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Joonhwi Joo

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

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