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demand estimation
Jonathan Levin

Di¤erentiated Products Demand Systems (A)
Jonathan Levin
Economics 257
Stanford University

Fall 2009

Demand Estimation

Fall 2009

1 / 27

Di¤erentiated Products Demand - Outline

Overview
Supply side
Product space
Characteristic space
Recent developments
Class Discussion

Jonathan Levin

Demand Estimation

Fall 2009

2 / 27

Why do we care?
Products in almost all markets are di¤erentiated to some extent.
Products di¤er in their physical characteristics, location, etc. This is true even for markets that are seemingly homogeneous (e.g. drugs, gasoline). We need some knowledge of the demand system in order to answer a broad set of questions. For example:
Measuring market power
Assessing the welfare e¤ects of mergers
Assessing the e¤ects of new taxes or tari¤s
Analyzing product introduction
Estimating the welfare e¤ects of new goods

We may also be interested in consumer behavior per se: who buys what products, and the importance of search costs, switching costs, consumer information, advertising brand loyalty and so forth for purchasing behavior.
Jonathan Levin

Demand Estimation

Fall 2009

3 / 27

Some preliminary comments

Theory on di¤erentiated products (Anderson, de Palma, and Thisse;
Shaked and Sutton; Caplin and Nalebu¤; and others) is mainly focused on the supply side: given a demand system, what are the products and prices chosen in equilibrium?
Due to various reasons (data, generality, and complexity) the empirical literature has tended to focus more on the demand side. We will discuss the simple Bertrand-Nash supply model used most often and spend the rest of the time on di¤erent alternatives to specify demand.
Note that in many regulated industries (electricity, water, postal services) prices are set through a non-market mechanism, making the demand side the natural place to start.

Jonathan Levin

Demand Estimation

Fall 2009

4 / 27

Some preliminary
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