Demand with Complementarity: A Market-Share Approach

Abstract

We propose a model of demand for bundles that deals with multiple purchases and allows for complementarity among products. Its identification and estimation only require the availability of aggregate data at product level (e.g., sales quantities), a feature that enables researchers to implement policy evaluations without observing individual-level purchases of bundles. We estimate the demand for Ready-To-Eat (RTE) cereals and milk in the US and investigate the policy implications of their complementarity. We find that RTE cereal and milk are overall complementary. As a result, policy change in one category may negatively affect the other, a new source of welfare loss in classic policy simulations such as sugar tax.

Keywords: complementarity, multiple purchase, market-level data, cross-category externality, sugar tax, demand for bundles