Demand Estimation with Flexible Income Effect: An Application to Pass-through and Merger Analysis

69 Pages Posted: 9 Jan 2023 Last revised: 15 Jul 2024

See all articles by Shuhei Kaneko

Shuhei Kaneko

University of California, Santa Barbara (UCSB) - Department of Economics

Yuta Toyama

Waseda University - Graduate School of Economics

Date Written: July 15, 2024

Abstract

This paper proposes a semiparametric discrete choice model that incorporates a nonparametric specification for income effects. The model allows for the flexible estimation of demand curvature, which has significant implications for pricing and policy analysis in oligopolistic markets. Our estimation algorithm adopts a method of sieve approximation with shape restrictions in a nested fixed-point algorithm. Applying this framework to the Japanese automobile market, we conduct a pass-through analysis of feebates and merger simulations. Our model predicts a higher pass-through rate and more significant merger effects than parametric demand models, highlighting the importance of flexibly estimating demand curvature.

Keywords: L1, L41, L62 Discrete choice model, differentiated product, income effect, semiparametric model, aggregate data, sieve approximation, shape restriction, pass-through analysis, merger simulation, automobile

JEL Classification: L1, L41, L62

Suggested Citation

Kaneko, Shuhei and Toyama, Yuta, Demand Estimation with Flexible Income Effect: An Application to Pass-through and Merger Analysis (July 15, 2024). Available at SSRN: https://ssrn.com/abstract=4320088 or http://dx.doi.org/10.2139/ssrn.4320088

Shuhei Kaneko

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

Santa Barbara, CA

Yuta Toyama (Contact Author)

Waseda University - Graduate School of Economics ( email )

1-6-1 Nishi-waseda, Shinjuku-ku
Tokyo
Japan

HOME PAGE: http://yutatoyama.github.io

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