Working Paper: CEPR ID: DP16981
Authors: Cameron Birchall; Frank Verboven
Abstract: We extend BLP's aggregate discrete-choice model of product differentiation to create more flexibility in the price functional form. We apply a Box-Cox specification, which relaxes the typical unit demand assumption and creates flexibility on demand curvature. The model provides a unifying framework for mixed logit and mixed CES models. Our illustrative application to the ready-to-eat cereals market shows that the cross-sectional relation between price elasticities and average prices per product is more in line with descriptive elasticity patterns. Furthermore, it suggests lower cross-price elasticities between similarly priced products than in more restrictive specifications.
Keywords: BLP; Demand Curvature; Mixed Logit; Mixed CES
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand curvature (D11) | price elasticities (D12) |
| joint model flexibility (C52) | breaking traditional linear relationship between price elasticities and prices (C29) |
| joint model (C23) | own-price elasticities independent of price (D11) |
| joint model (C23) | lower cross-price elasticities between similarly priced products (D43) |
| neglecting demand curvature (D11) | biased estimates of substitution patterns (C51) |