Tuesday, August 25, 2009
Coverage of Retail Stores and Discrete Choice Models of Demand: Estimating Price Elasticities and Welfare Effects
Posted by D. Daniel Sokol
Franco Mariuzzo (The Geary Institute University College Dublin) Patrick Paul Walsh (SPIRe and The Geary Institute University College Dublin) and Ciara Whelan (Univesity College Dublin) explain Coverage of Retail Stores and Discrete Choice Models of Demand: Estimating Price Elasticities and Welfare Effects.
ABSTRACT: Since retail stores tend to host a subset of products available in the market, Ackerberg and Rysman (2005) allow logit errors to represent idiosyncratic unobserved consumer preferences over retail stores and products. Having product level data on store coverage we are able to estimate their logit, nested logit and random coefficients logit models of product demand jointly with cost, in a structural model of equilibrium, for Carbonated Soft Drink products. As Ackerberg and Rysman's (2005) Monte Carlo study suggests; using standard logit errors does lead to predictable biases in estimated price elasticities and welfare. A counterfactual that imposes full coverage of stores by products, in our structural equilibrium, increases the estimated price elasticities and welfare. Competition in markets is more curtailed than assumed when one works with standard logit errors.