Commonly Used IVs          BLP 95                 Goldberg 95   Nevo 2001                    Applications and Choice of IV...
Commonly Used IVs                 BLP 95                     Goldberg 95   Nevo 2001                                     I...
Commonly Used IVs                   BLP 95               Goldberg 95       Nevo 2001                                     T...
Commonly Used IVs                 BLP 95               Goldberg 95         Nevo 2001 Commonly used IVs: competition in cha...
Commonly Used IVs                 BLP 95               Goldberg 95             Nevo 2001                       Commonly us...
Commonly Used IVs              BLP 95                   Goldberg 95                  Nevo 2001                    Commonly...
Commonly Used IVs            BLP 95   Goldberg 95    Nevo 2001    Berry, Levinsohn, Pakes “Automobile Prices in Market    ...
Commonly Used IVs                   BLP 95          Goldberg 95          Nevo 2001                                        ...
Commonly Used IVs               BLP 95                 Goldberg 95     Nevo 2001                                 Demand Mo...
Commonly Used IVs                   BLP 95                Goldberg 95                   Nevo 2001                         ...
Commonly Used IVs          BLP 95         Goldberg 95   Nevo 2001                    Table 3: e¤ect of IV (in Logit)
Commonly Used IVs    BLP 95           Goldberg 95   Nevo 2001                    Tables 5: elasticities
Commonly Used IVs    BLP 95           Goldberg 95   Nevo 2001                    Tables 6: elasticities
Commonly Used IVs           BLP 95         Goldberg 95       Nevo 2001               Table 7: substitution to the outside ...
Commonly Used IVs   BLP 95        Goldberg 95   Nevo 2001                    Table 8: markups
Commonly Used IVs                  BLP 95                 Goldberg 95      Nevo 2001                                      ...
Commonly Used IVs                 BLP 95               Goldberg 95      Nevo 2001       Goldberg “Product Di¤erentiation a...
Commonly Used IVs             BLP 95              Goldberg 95               Nevo 2001                               Demand...
Commonly Used IVs                BLP 95               Goldberg 95        Nevo 2001                                        ...
Commonly Used IVs                 BLP 95                Goldberg 95             Nevo 2001                                 ...
Commonly Used IVs            BLP 95           Goldberg 95   Nevo 2001                    Table II: price elasticities by c...
Commonly Used IVs          BLP 95           Goldberg 95   Nevo 2001                    Table III: price semi-elasticities
Commonly Used IVs       BLP 95         Goldberg 95   Nevo 2001                    Table IV: implied markups
Commonly Used IVs            BLP 95               Goldberg 95   Nevo 2001     Nevo, "Measuring Market Power in the Ready-t...
Commonly Used IVs                 BLP 95              Goldberg 95             Nevo 2001                            The RTE...
Commonly Used IVs                  BLP 95               Goldberg 95   Nevo 2001                                           ...
Commonly Used IVs                 BLP 95                 Goldberg 95   Nevo 2001                                          ...
Commonly Used IVs                    BLP 95                    Goldberg 95                Nevo 2001                       ...
Commonly Used IVs                 BLP 95                  Goldberg 95        Nevo 2001                                    ...
Commonly Used IVs                 BLP 95               Goldberg 95             Nevo 2001                                  ...
Commonly Used IVs                  BLP 95                  Goldberg 95                Nevo 2001                           ...
Commonly Used IVs   BLP 95           Goldberg 95   Nevo 2001                      Logit Demand
Commonly Used IVs        BLP 95         Goldberg 95   Nevo 2001                    Results from the Full Model
Commonly Used IVs   BLP 95              Goldberg 95   Nevo 2001                         Elasticities
Commonly Used IVs   BLP 95             Goldberg 95   Nevo 2001                             Margins
Commonly Used IVs                  BLP 95                  Goldberg 95                Nevo 2001                           ...
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Applications and Choice of IVs.

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Applications and Choice of IVs.

  1. 1. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Applications and Choice of IVs NBER Methods Lectures Aviv Nevo Northwestern University and NBER July 2012
  2. 2. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Introduction In the previous lecture we discussed the estimation of DC model using market level data The estimation was based on the moment condition E (ξ jt jzjt ) = 0. In this lecture we will discuss commonly used IVs survey several applications
  3. 3. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 The role of IVs IVs play dual role generate moment conditions to identify θ 2 deal with the correlation of prices and error Simple example (Nested Logit model) sjt sjt ln( ) = xjt β + αpjt + ρ ln( ) + ξ jt s0t sGt even if price exogenous, "within market share" is endogenous Price endogeneity can be handled in other ways (e.g., panel data)
  4. 4. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Commonly used IVs: competition in characteristics space Assume that E (ξ jt jxt ) = 0, observed characteristics are mean independent of unobserved characteristics BLP propose using own characteristics sum of char of other products produced by the …rm sum of char of competitors products Power: proximity in characteristics space to other products ! markup ! price Validity: xjt are assumed set before ξ jt is known Not hard to come up with stories that make these invalid Most commonly used do not require data we do not already have Often (mistakenly) called "BLP Instruments"
  5. 5. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Commonly used IVs: cost based Cost data are rarely directly observed BLP (1995, 1999) use characteristics that enter cost (but not demand) Villas-Boas (2007) uses prices of inputs interacted with product dummy variables (to generate variation by product) Hausman (1996) and Nevo (2001) rely on indirect measures of cost use prices of the product in other markets validity: after controlling for common e¤ects, the unobserved characteristics are assumed independent across markets power: prices will be correlated across markets due to common marginal cost shocks easy to come up with examples where IVs are not valid (e.g., national promotions)
  6. 6. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Commonly used IVs: dynamic panel Ideas from the dynamic panel data literature (Arellano and Bond, 1991, Blundell and Bond, 1998) have been used to motivate the use of lagged characteristics as instruments. Proposed in a footnote in BLP For example, Sweeting (2011) assumes ξ jt = ρξ jt 1 + η jt , where E (η jt jxt 1 ) = 0.Then E (ξ jt ρξ jt 1 jxt 1 ) =0 is a valid moment condition
  7. 7. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Berry, Levinsohn, Pakes “Automobile Prices in Market Equilibrium” (EMA, 95) – BLP Points to take away: 1. The e¤ect of IV 2. Logit versus RC Logit
  8. 8. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Data 20 years of annual US national data, 1971-90 (T=20): 2217 model-years Quantity data by name plate (excluding ‡eet sales) Prices – list prices Characteristics from Automotive News Market Data Book Price and characteristics correspond to the base model Note: little/no use of segment and origin information
  9. 9. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Demand Model The indirect utility is uijt = xjt βi + α ln(yi pjt ) + ξ jt + εijt Note: income enters di¤erently than before. βk i = βk + σk vik vik N (0, 1) The outside option has utility uijt = α ln(yi ) + ξ jt + σ0 vi 0 + εijt
  10. 10. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Estimation Basically estimate as we discussed before. add supply-side moments (changes last step of the algorithm) help pin down demand parameters adds cost side IVs Instrumental variables. assume E (ξ jt jxt ) = 0, and use (i) own characteristics (ii) sum of char of other products produced by the …rm (iii) sum of characteristics products produced by other …rms Cost side: E (ξ jt jwt ) = 0 E¢ ciency: (i) importance sampling for the simulation of market shares (ii) discussion of optimal instruments (iii) parametric distribution for income (log-normal)
  11. 11. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Table 3: e¤ect of IV (in Logit)
  12. 12. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Tables 5: elasticities
  13. 13. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Tables 6: elasticities
  14. 14. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Table 7: substitution to the outside option
  15. 15. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Table 8: markups
  16. 16. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Summary Powerful method with potential for many applications Clearly show: e¤ect of IV RC logit versus logit Common complaints: instruments supply side: static, not tested, driving the results demand side dynamics
  17. 17. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Goldberg “Product Di¤erentiation and Oligopoly in International Markets: The Case of the Automobile Industry” (EMA, 95) I will focus on the demand model and not the application Points to take away endogeneity with household-level date Nested Logit versus RC Logit
  18. 18. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Demand Model Nested Logit nests determined by buy/not buy, new/used, county of origin (foreign vs domestic) and segment This model can be viewed as using segment and county of origin as (dummy) characteristics, and assuming a particular distribution on their coe¢ cients.
  19. 19. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Data Household-level survey from the Consumer Expenditure Survey: 20,571, HH between 83-87 6,172 (30%) bought a car 1,992 (33%) new car 1,394 (70%) domestic and 598 foreign Prices (and characteristics) are obtained from Automotive News Market Data Book
  20. 20. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Estimation The model is estimated by ML The likelihood is partitioned and estimated recursively: At the lowest level the choice of model conditional on origin, segment and neweness, based on the estimated parameters an “inclusive value” is computed and used to estimate the choice of origin conditional on segment and neweness, etc. Does not deal with endogeneity. Origin and segment …xed e¤ects are included, but these do not fully account for brand unobserved characteristics
  21. 21. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Table II: price elasticities by class
  22. 22. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Table III: price semi-elasticities
  23. 23. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Table IV: implied markups
  24. 24. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Nevo, "Measuring Market Power in the Ready-to-eat Cereal Industry" (EMA, 2001) Points to take away: 1. industry where characteristics are less obvious. 2. e¤ects of various IV’ s 3. testing the model of competition 4. comparison to alternative demand models (later)
  25. 25. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 The RTE cereal industry Characterized by: high concentration (C3 75%, C6 90%) high price-cost margins ( 45%) large advertising to sales ratios ( 13%) numerous introductions of brands (67 new brands by top 6 in 80’s) This has been used to claim that this is a perfect example of collusive pricing
  26. 26. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Questions Is pricing in the industry collusive? What portion of the markups in the industry due to: Product di¤erentiation? Multi-product …rms? Potential price collusion?
  27. 27. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Strategy Estimate brand level demand Compute PCM predicted by di¤erent industry structuresnmodels of conduct: Single-product …rms Current ownership (multi-product …rms) Fully collusive pricing (joint ownership) Compare predicted PCM to observed PCM
  28. 28. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Supply The pro…ts of …rm f Πf = ∑ (pj mcj )qj (p ) Cf j 2Ff the …rst order conditions are ∂qr (p ) sj ( p ) + ∑ (pr mcr ) ∂pj =0 r 2Ff De…ne Sjr = ∂sr /∂pj j, r = 1, ..., J, and Sjr if 9fr , j g Ff Ωjr = 0 otherwise s (p ) + Ω (p mc ) = 0 and (p mc ) = Ω 1 s (p ) Therefore by: (1) assuming a model of conduct; and (2) using estimates of the demand substitution; we are able to compute price-cost margins under di¤erent “ownership” structures
  29. 29. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Demand Utility, as before uijt = xjt βi + αi pjt + ξ jt + εijt Allow for brand dummy variables (to capture the part of ξ jt that does not vary by market) captures characteristics that do not vary over markets
  30. 30. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Data IRI Infoscan scanner data market shares – de…ned by converting volume to servings prices – pre-coupon real transaction per serving price 25 brands (top 25 in last quarter), in 67 cities (number increases over time) over 20 quarters (1988-1992); 1124 markets, 27,862 observations LNA advertising data Characteristics from cereal boxes Demographics from March CPS Cost instruments from Monthly CPS Market size – one serving per consumer per day
  31. 31. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Estimation Follows the method we discussed before Uses only demand side moments Explores various IVs: characteristics of competition; problematic for this sample, with brand FE prices in other cities proxies for city level costs: density, earning in retail sector, and transportation costs Brand …xed e¤ects control for unobserved quality (instead of instrumenting for it) identify taste coe¢ cients by minimum distance
  32. 32. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Logit Demand
  33. 33. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Results from the Full Model
  34. 34. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Elasticities
  35. 35. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Margins
  36. 36. Commonly Used IVs BLP 95 Goldberg 95 Nevo 2001 Comments/Issues Is choice discrete? Ignores the retailer – uses retailer prices to study manufacturer competition retail margins go into marginal cost marginal costs do not vary with quantity, therefore this restricts the retailers pricing behavior which direction will this bias the …nding? Most likely towards …nding collusion where there is none (the retailer behavior might take into account e¤ects across products) So…a Villas Boas (2007) extends the model Much of the price variation at the store-level is coming from "sales". How does this impact the estimation? data is quite aggregated:quarter-brand-city "sales" generate incentives for consumer to stockpile Follow up work by Hendel and Nevo looked at this

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