Working Paper: NBER ID: w25215
Authors: Jean-Pierre H. Dub
Abstract: A long literature has developed econometric methods for estimating individual-consumer-level demand systems that accommodate corner solutions. The increasing access to transaction-level customer purchase histories across a wide array of markets and industries vastly expands the prospect for improved customer insight, more targeted marketing policies and individualized welfare analysis. A descriptive analysis of a broad, CPG database indicates that most consumer brand categories offer a wide variety of differentiated offerings for consumers. However, consumers typically purchase only a limited scope of the available variety, leading to a very high incidence of corner solutions which poses computational challenges for demand modeling. Historically, these computational challenges have limited the applicability of microeconometric models of demand in practice, except for the special case of pure discrete choice (e.g., logit and probit). Recent advances in computing power along with methods for numerical and simulation-based integration have been instrumental in facilitating the broader use of these models in practice. We survey herein the extant literature on the neoclassical derivation of microeconometric demand models that allow for corner solutions and differentiated products. We summarize the key developments in the literature, including the role of consumers’ price expectations, and point towards opportunities for future research.
Keywords: Microeconometrics; Consumer Demand; Corner Solutions; Differentiated Products; Marketing Strategies
JEL Codes: D11; D12; L66; M3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| microeconometric models (C24) | accounting for corner solutions (D43) |
| data granularity (C55) | effectiveness of marketing strategies (M30) |
| prices (P22) | demand (R22) |