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 accommodate endogeneity and, at the same time, capture 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 illustration to US automobile demand.
Bibliographical noteFunding Information:
We thank participants in presentations at Georgetown, Johns Hopkins, Ohio State, Penn State, Rice, Texas A&M, UC Davis, UC Irvine, UCLA, Chicago Booth, Michigan, UPenn, Wisconsin, Southampton, the 2009 California Econometrics Conference and the 2010 Econometric Society World Congress for helpful comments. Chris Hansen, Han Hong, Sung Jae Jun, Jinyong Hahn, and Rosa Matzkin provided very helpful discussions. Moon acknowledges the NSF for financial support via SES 0920903. Weidner acknowledges support from the Economic and Social Research Council through the ESRC Centre for Microdata Methods and Practice grant RES-589-28-0001, and from the European Research Council grant ERC-2014-CoG-646917-ROMIA.
© 2018 The Author(s)
All Science Journal Classification (ASJC) codes
- Economics and Econometrics