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K. Sudhir
Yale School of Management
Quantitative Marketing and Structural Econometrics Workshop
Duke University
July 30 - August 1 2013
Agenda
Session
Why
Compare
analysis
Value
Marketers
Heterogeneity:
estimates
Market Data
Longitudinal:
quantity
Prices/attributes/instruments
Definition of market size
Distribution of demographics (sometimes)
Quantity
Price
Attributes
Instruments
Price
Attributes
Instruments
Market/Time 2
Product
Quantity
s0t 1 s j
j 1
Notation
or Periods: t 1,, T
Product j = 0,1,, J , with j = 0 the outside good
Consumer i makes choice j {0,1,, J } in market t
Indirect Utility Function: U (x jt , xjt , p jt , Dit , nit ; q)
Markets
x jt
x jt
p jt
Dit
nit
Indirect
Notation
Indirect
Utility Function:
q2 = (P, Sn )
i
q1
Mean Heterogeneity
Convenient
Mean
m(x jt , p jt , Di , ni ; q2 )
+ eijt
d = x b + ap + x , and m = (p , x )(PD + S )
jt
jt
jt
jt
ijt
jt
jt
i
n
i
data
Not an issue with consumer level data, because we have
heterogeneity in choices across consumers
Endogeneity: Corr (p jt , xjt )
xjt is
(JPE 1989)
famous analysis of
Body CT scanners
using nested logit
model
Positive coefficient on
priceupward sloping
demand curve
Attributed
to omitted
quality variables
Utility Function:
q2 = (P, Sn )
i
q1
Average Heterogeneity
Convenient
Mean
m(x jt , p jt , Di , ni ; q2 )
+ eijt
d = x b + ap + x , and m = (p , x )(PD + S )
jt
jt
jt
jt
ijt
jt
jt
i
n
i
s jt =
exp{djt }
J
exp{dkt }
k =0
s jt
s 0t
s 0t =
1
J
exp{dkt }
Normalize
d0t = 0
k =0
= exp{djt }
Step
where q = (b, a)
where X = [x p ]
Start
with
W =I
or W
= (Z 'Z )-1
'
'
-1
Re-compute W = (E (Z xx Z )}
Elasticity:
Cross
Elasticity:
Bad Properties:
h j = j
p j
s
h jk = j
pk
sj
pj
sj
pk
= ap j (1 - s j )
= apk sk
Own
Cross-elasticity
preferences
Even
if no price endogeneity,
we cannot avoid instruments
Additional
moments are
needed to estimate
The
Utility Function:
q2 = (P, Sn )
i
q1
Average Heterogeneity
Split
Mean
m(x jt , p jt , Di , ni ; q2 )
+ eijt
d = x b + ap + x , and m = (p , x )(PD + S )
jt
jt
jt
jt
ijt
jt
jt
i
n
Analytical
Di ,ni
dF (Di , ni ; q2 )
exp{dkt + mikt (Di , ni ; q2 )}
J
k =0
Own
s
Elasticity: hj = pj
j
Cross
Elasticity:
Good Properties
Higher
h jk = j
pk
sj
pj
=
sj
pk
pj
sj
as
=-
i ij
pk
sj
as s
i ij ik
dF (D, n )
logit, outside
good captures all
effects of price
increase due to IIA
With RC logit, IIA
problem reduced
Expensive
cars
have less
substitution to
outside good
For
s j (dt , xt , pt ; q2 )
An illustrative problem
Code
and Data
Data
provided in data.csv
Matlab code: Agglogit.m (main program) calls
AgglogitGMM.m (the function to be minimized)
Problem
Definition
J=2
s11
S = s21
s12
s22
0
s
33
b1 0 0
L = b2 b3 0
0 0 b4
Cholesky Decomposition
Sn = LL '
i
b1 0 0
L = b2 b3 0
0 0 b4
1
sjt =
NS
exp{djt + (p jt x jt )(PDi + ni )}
NS
i =1
exp{d
k =0
kt
+ (pkt x kt )(PDi + ni )}
and ,
1, ,
are draws from
that are drawn and fixed over optimization
Where
Simulation
) and
( )
Importance
For
q2
Standard
Summary
Why
is BLP popular?
Handles
Reviewed
estimation algorithms
Homogenous
Simulation
distribution
Drawing
Contraction
mapping
Linearization
Generalized
We
Method of Moments
Session 2
Session 2: Agenda
Contrasting
micro moments
Adding supply moments
q2 = (P, Sn )
i
q1
Average Heterogeneity
Split
d = x b + ap + x , and m = (p , x )(PD + S )
jt
jt
jt
jt
ijt
jt
jt
i
n
i
For
s j (dt , xt , pt ; q2 )
Problems:
Can
With
But
parameters
Choosing Instruments
Choosing instruments
The
E (x jt | Z ) = 0
Recall
Correcting
These
Other
Sum
Key
Widely
known
Generally
hard to find
BLP use scale economies argument to use total
production as a cost instrument
Input
factor prices
Affects
1996)
If
Identification
Step
2: Estimate q1
q1
But
Across
markets, variation in
demographics
Across
time, variation in
choice
To
add
micro data
add supply model
(1995)
National
(2001)
Many
Problem: Is
characteristics?
affected by market
Can
If
Identification:
Adding Micro Moments
Level Data
2005)
cross-sections of consumer choice
second
Segment
Summaries
Quantity/share
Set
1: Price Sensitivity
E [{i purchases new vehicle|{yi < y1 }]
Identification:
Adding Supply Moments
ds
ds
1
J
1
1 1
dsJ
dsJ
pJ cJ
sJ
... dp
dp
J
1
ds
1t
c p dp ... dp
s
Jt
1t 1t 1t
1t
s
c p dsJt ... dsJt
Jt
Jt
Jt
dp1t
dpJt
p jt
- m jt = wWjt + w jtMargin (m jt )
cjt
Construct
E(w jt | Z c ) = 0
Stack
x jt (q ) | Z
=0
E
w
(
q
,
w
)
|
Z
jt
c
Since
in
Elasticity:
Elasticity:
h j = j
p j
s
h jk = j
pk
sj
pj
sj
pk
pj
sj
=-
as
i ij
pk
sj
as s
i ij ik
dF (D, n )
Exercises
Estimate
Summary
Session 1:
Session 2
MPEC versus BLP Contraction mapping (Nested Fixed Point)
Instruments
Identification
Improving precision through
Micro
8/2/13 7:24 AM
%
%
%
%
%
C:\Users\sk389\Dropbox\Duke\AggLogit.m
1 of 2
8/2/13 7:24 AM
C:\Users\sk389\Dropbox\Duke\AggLogit.m
2 of 2
wp=(reshape([wp';wp'],NCons,NObs1))';
b0=ones(4,1);
blin=bIV3;
options=optimset('Display','iter','TolFun',1e-12,'TolX',1e-12,'MaxIter',2500,
'MaxFunEvals',5000, 'LargeScale','off', 'HessUpdate', 'dfp');
[b, fval,exitflag,output,grad,hessian] = fminunc('AgglogitGMM',b0,options);
';
'Q2
';
'Q3
'; 'L11
'; 'L12
8/2/13 7:15 AM
C:\Users\sk389\Dropbox\Duke\AgglogitGMM.m
1 of 1
For the linear parameters q1 , this reduces to the corresponding variables X, while we need
to take the derivatives with respect to q2
1
2. S =
N
Z x x Z
'
'
i i i
i =1
q (d(q2 ) needs to be computed as an integral over the consumer heterogeneity, and therefore
2
needs to be embedded in the code where the simulated shares are calculated. Since these gradients
are not needed in the estimation, it should be computed outside the estimation loops.
d1t
q21
q (d(q2 ) = D d.t =
2
dJt
q21
s jt
djt
s jt
dkt
s jt
q2l
=
=
=
s1t
d
q2 L
21
=
dJt
sJt
q2 L
d21
d1t
1
NS
1
NS
1
NS
J
l
l
x n
s
i jti jt xktl skti
i =1
k =1
NS
i =1
jti
d2 L
s
d Jt
2L
s1t
-1
s1t
q21
sJt
q21
sJt
q2 L
s1t
q2 L
(1 - s jti )
NS
i =1
jti kti
NS
Standard errors are obtained from the square root of the diagonal of V(bGMM ) .