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The flexible coefficient multinomial logit (FC-MNL) model of demand for differentiated products

Authors


  • Thanks are due to The British Academy, grant number LRG-39888, for their generous funding, and to Ricardo Ribeiro for his excellent research assistance. Naturally, this paper is a research paper, representing solely the view of the authors. This paper has evolved and been expanded but also draws upon a paper first circulated in 2001 under the title of “Demand Models for Market Level Data,” mimeo MIT (http://web.mit.edu/pjdavis/www/papers/mainbody_paper.pdf) and subsequently expanded and recirculated in 2006 as CEPR working paper #5880 under the title of “The Discrete Choice Analytically Flexible (DCAF) Model of Demand for Differentiated Products” (http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=5880.asp). Last, but certainly not least, we should add our wholehearted thanks to the editor and three referees whose constructive comments and suggestions have materially improved the paper.

Abstract

We show FC-MNL is flexible in the sense of Diewert (1974), thus its parameters can be chosen to match a well-defined class of possible own- and cross-price elasticities of demand. In contrast to models such as Probit and Random Coefficient-MNL models, FC-MNL does not require estimation via simulation; it is fully analytic. Under well-defined and testable parameter restrictions, FC-MNL is shown to be an unexplored member of McFadden's class of Multivariate Extreme Value discrete-choice models. Therefore, FC-MNL is fully consistent with an underlying structural model of heterogeneous, utility-maximizing consumers. We provide a Monte-Carlo study to establish its properties and we illustrate its use by estimating the demand for new automobiles in Italy.

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