Econometrica

Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Sep, 2016, Volume 84, Issue 5

Large Market Asymptotics for Differentiated Product Demand Estimators with Economic Models of Supply

https://doi.org/10.3982/ECTA10600
p. 1961-1980

Timothy B. Armstrong

IO economists often estimate demand for differentiated products using data sets with a small number of large markets. This paper addresses the question of consistency and asymptotic distributions of instrumental variables estimates as the number of products increases in some commonly used models of demand under conditions on economic primitives. I show that, in a Bertrand–Nash equilibrium, product characteristics lose their identifying power as price instruments in the limit in certain cases, leading to inconsistent estimates. The reason is that product characteristic instruments achieve identification through correlation with markups, and, depending on the model of demand, the supply side can constrain markups to converge to a constant quickly relative to sampling error. I find that product characteristic instruments can yield consistent estimates in many of the cases I consider, but care must be taken in modeling demand and choosing instruments. A Monte Carlo study confirms that the asymptotic results are relevant in market sizes of practical importance.


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Supplement to "Large Market Asymptotics for Differentiated Product Demand Estimators with Economic Models of Supply"

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Supplement to "Large Market Asymptotics for Differentiated Product Demand Estimators with Economic Models of Supply"

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