Working Paper

Estimation of random coefficients logit demand models with interactive fixed effects

Authors

Hyungsik Roger Roger Moon, Matthew Shum, Martin Weidner

Published Date

30 March 2012

Type

Working Paper (CWP08/12)

We extend the Berry, Levinsohn and Pakes (BLP, 1995) random coefficients discrete-choice demand model, which underlies much recent empirical work in IO. We add interactive fixed effects in the form of a factor structure on the unobserved product characteristics. The interactive fixed effects can be arbitrarily correlated with the observed product characteristics (including price), which accommodates endogeneity and, at the same time, captures strong persistence in market shares across products and markets. We propose a two step least squares-minimum distance (LS-MD) procedure to calculate the estimator. Our estimator is easy to compute, and Monte Carlo simulations show that it performs well. We consider an empirical application to US automobile demand.


Latest version

Estimation of random coefficients logit demand models with interactive fixed effects
Hyungsik Roger Moon, Matthew Shum, Martin Weidner
CWP12/17