Semiparametric Estimation of a CES Demand System with Observed and
Unobserved Product Characteristics
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by
Ali Hortacsu, Joonhwi Joo
2017
Abstract
We develop a characteristics based demand estimation framework for the
Marshallian demand system obtained by solving a budget-constrained constant
elasticity of substitution (CES) utility maximization problem. From our
Marshallian CES demand system, we derive the same market share equation of
Berry (1994); Berry, Levinsohn, and Pakes (1995)'s characteristics based logit
demand system. Our CES demand estimation framework can accommodate zero
predicted and observed market shares by conceptually separating the
whether-to-buy decision and how-much-to-buy decision. Furthermore, the
estimator we suggest allows a tractable semiparametric estimation strategy that
is flexible regarding the distribution of unobservable product characteristics.
We apply our framework to scanner data on cola sales, where we show estimated
demand curves can be upward sloping if zero market shares are not accommodated
properly.
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