Working Paper: CEPR ID: DP15630
Authors: Laura Grigolon
Abstract: Prominent features of differentiated product markets are segmentation and product proliferation blurring the boundaries between segments. I develop a tractable demand model, the Ordered Nested Logit, which allows for asymmetric substitution between segments. I apply the model to the automobile market where segments are ordered from small to luxury. I find that consumers, when substituting outside their vehicle segment, are more likely to switch to a neighboring segment. Accounting for such asymmetric substitution matters when evaluating the impact of new product introduction or the effect of subsidies on fuel-efficient cars.
Keywords: No keywords provided
JEL Codes: D11; D12; L62; M3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumers are more likely to substitute to neighboring segments (D12) | Substitution to neighboring segments (C34) |
| Introduction of new premium subcompact cars (F12) | Significant substitution effect to neighboring segments (C24) |
| Subsidies for clean vehicles (H23) | Decrease in sales of higher segments (D49) |
| Subsidies for clean vehicles (H23) | Affect sales in subcompact and compact cars (F61) |
| Ordered nested logit model predicts significant substitution effect (C35) | Contrasts with nested logit model (C25) |