CREST Microeconomics Seminar : 

Ao Wang- “A BLP Demand Model of Product-Level Market Shares with Complementarity”

Abstract: Applied researchers most often estimate the demand for differentiated products assuming that at most one item can be purchased. Yet multiple purchases are pervasive. Ignoring this feature can lead to erroneous counterfactuals, in particular, because complementarities are ruled out. I consider the identification and estimation of a random coefficient discrete choice model of bundles, namely sets of products, when only product-level market shares are available. This last feature arises when only aggregate market shares, as opposed to individual purchases, are available, a very common phenomenon in practice. Following the classical approach with aggregate data, I consider a two-step method. First, using a novel inversion result where demand can exhibit complementarity, I recover the mean utilities of products from the product-level market shares. Second, to infer the structural parameters from the mean utilities while dealing with price endogeneity, I use instrumental variables. I provide low-level conditions under which the model is globally identified through moment conditions based on such instruments. Finally, I examine the practical performance of the methods in the context of the ready-to-eat (RTE) cereal industry in the US. Aligned with recent findings in the literature, the estimation results suggest substantial complementarities among different RTE cereal brands. Ignoring such complementarities results in misleading counterfactuals.