[Part 15] 1/24 Discrete Choice Modeling Aggregate Share Data - BLP Discrete Choice Modeling William Greene Stern School of Business New York University 0 Introduction 1 Summary 2 Binary Choice 3 Panel Data 4 Bivariate Probit 5 Ordered Choice 6 Count Data 7 Multinomial Choice 8 Nested Logit 9 Heterogeneity 10 Latent Class 11 Mixed Logit 12 Stated Preference 13 Hybrid Choice 14. Spatial Data 15. Aggregate Market Data
24
Embed
[Part 15] 1/24 Discrete Choice Modeling Aggregate Share Data - BLP Discrete Choice Modeling William Greene Stern School of Business New York University.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Automobile Prices in Market Equilibrium, S. Berry, J. Levinsohn, A. Pakes, Econometrica, 63, 4, 1995, 841-890. (BLP)http://people.stern.nyu.edu/wgreene/Econometrics/BLP.pdf
A Practitioner’s Guide to Estimation of Random-Coefficients Logit Models of Demand, A. Nevo, Journal of Economics and Management Strategy, 9, 4, 2000, 513-548http://people.stern.nyu.edu/wgreene/Econometrics/Nevo-
BLP.pdf
A New Computational Algorithm for Random Coefficients Model with Aggregate-level Data, Jinyoung Lee, UCLA Economics, Dissertation, 2011http://people.stern.nyu.edu/wgreene/Econometrics/Lee-BLP.pdf
[Part 15] 4/24
Discrete Choice Modeling
Aggregate Share Data - BLP
Theoretical Foundation Consumer market for J differentiated brands of a good
j =1,…, Jt brands or types i = 1,…, N consumers t = i,…,T “markets” (like panel data)
Consumer i’s utility for brand j (in market t) depends on p = price x = observable attributes f = unobserved attributes w = unobserved heterogeneity across consumers ε = idiosyncratic aspects of consumer preferences
Observed data consist of aggregate choices, prices and features of the brands.
[Part 15] 5/24
Discrete Choice Modeling
Aggregate Share Data - BLP
BLP Automobile Market
t
Jt
[Part 15] 6/24
Discrete Choice Modeling
Aggregate Share Data - BLP
Random Utility Model
Utility: Uijt=U(wi,pjt,xjt,fjt|), i = 1,…,(large)N, j=1,…,J wi = individual heterogeneity; time (market) invariant. w has a
continuous distribution across the population. pjt, xjt, fjt, = price, observed attributes, unobserved features of
brand j; all may vary through time (across markets) Revealed Preference: Choice j provides maximum
utility Across the population, given market t, set of prices pt
and features (Xt,ft), there is a set of values of wi that induces choice j, for each j=1,…,Jt; then, sj(pt,Xt,ft|) is the market share of brand j in market t.
There is an outside good that attracts a nonnegligible market share, j=0. Therefore,
< j t t t tJ
j=1s ( , , | ) 1p X f θ
[Part 15] 7/24
Discrete Choice Modeling
Aggregate Share Data - BLP
Functional Form
(Assume one market for now so drop “’t.”)Uij=U(wi,pj,xj,fj|)= xj'β – αpj + fj + εij = δj + εij
Econsumers i[εij] = 0, δj is E[Utility].
Will assume logit form to make integration unnecessary. The expectation has a closed form.
j j qq j
Market Share E Prob( )
[Part 15] 8/24
Discrete Choice Modeling
Aggregate Share Data - BLP
Heterogeneity
Assumptions so far imply IIA. Cross price elasticities depend only on market shares.
Individual heterogeneity: Random parameters
Uij=U(wi,pj,xj,fj|i)= xj'βi – αpj + fj + εij
βik = βk + σkvik. The mixed model only imposes IIA for a
particular consumer, but not for the market as a whole.
[Part 15] 9/24
Discrete Choice Modeling
Aggregate Share Data - BLP
Endogenous Prices: Demand side
Uij=U(wi,pj,xj,fj|)= xj'βi – αpj + fj + εij
fj is unobserved Utility responds to the unobserved fj Price pj is partly determined by features fj. In a choice model based on observables,
price is correlated with the unobservables that determine the observed choices.
[Part 15] 10/24
Discrete Choice Modeling
Aggregate Share Data - BLP
Endogenous Price: Supply Side
There are a small number of competitors in this market Price is determined by firms that maximize profits given the
features of its products and its competitors. mcj = g(observed cost characteristics c,
unobserved cost characteristics h) At equilibrium, for a profit maximizing firm that produces
one product, sj + (pj-mcj)sj/pj = 0
Market share depends on unobserved cost characteristics as well as unobserved demand characteristics, and price is correlated with both.
[Part 15] 11/24
Discrete Choice Modeling
Aggregate Share Data - BLP
Instrumental Variables(ξ and ω are our h and f.)
[Part 15] 12/24
Discrete Choice Modeling
Aggregate Share Data - BLP
Econometrics: Essential Components
ijt jt i jt ijt
i0t i0t
i i 1
ijt
jt i jtj t t i J
mt i mtm 1
U f
U (Outside good)
v , diagonal( ,...)
~ Type I extreme value, IID across all choices
exp( f )Market shares: s ( , : ) , j 1,...,
1 exp( f )
x
xX f
xtJ
[Part 15] 13/24
Discrete Choice Modeling
Aggregate Share Data - BLP
Econometrics
i
jt i jtj t t i tJ
mt i mtm 1
jt i jtj t t iJ
mt i mtm 1
exp( f )Market Shares: s ( , : ) , j 1,..., J
1 exp( f )
exp( f )Expected Share: E[s ( , : )] dF( )
1 exp( f )
Expected Shares are estimated using simulati
xX f
x
xX f
x
R jt ir jtj t t Jr 1
mt ir mtm 1
on:
exp[ v ) f ]1s ( , : )
R 1 exp[ v ) f ]
xX f
x
[Part 15] 14/24
Discrete Choice Modeling
Aggregate Share Data - BLP
GMM Estimation Strategy - 1
R jt ir jtjt t t Jr 1
mt ir mtm 1
jt
jt jt
jt
exp[ v ) f ]1s ( , : )
R 1 exp[ v ) f ]
We have instruments such that
E[f ( ) ] 0
f is obtained from an inverse mapping by equating the
ˆfitted market shares,
xX f
x
z
z
s
t
1t t t t t
, to the observed market shares, .
ˆˆ ˆ( , : ) so ( , : ).t
S
s X f S f s X S
t
t t
[Part 15] 15/24
Discrete Choice Modeling
Aggregate Share Data - BLP
GMM Estimation Strategy - 2
t
jt
jt jt
1t t t t t
J
t jt jtj 1t
t t t
We have instruments such that
E[f ( ) ] 0
ˆˆ ˆ( , : ) so ( , : ).
1 ˆˆDefine = fJ
ˆ ˆ ˆGMM Criterion would be Q ( )
where = the weighting matrix for mi
t
z
z
s X f S f s X S
g z
g Wg
W
t t
tT J
jt jtt 1 j 1t
nimum distance estimation.
For the entire sample, the GMM estimator is built on
1 1 ˆˆ ˆ ˆ = f and Q( )=T J
g z gWg
[Part 15] 16/24
Discrete Choice Modeling
Aggregate Share Data - BLP
BLP Iteration
(0)t t
(M 1) (M 1) (M 1) (M 1)t t t
ˆBegin with starting values for and starting values for
structural parameters and .
ˆ ˆ ˆˆCompute predicted shares ( , : , ).
Find a fixedINNER (Contraction Mapping)
ff
s X f
(M) (M 1) (M 1) (M 1) (M 1) (M 1) (M) (M 1) (M 1) (M 1)t t t t t t t t
(M) (M) (M)t
point for
ˆ ˆ ˆ ˆ ˆˆ ˆˆ ˆˆlog( ) log[ ( , : , )] ( , , )
ˆ ˆ ˆ With in hand, use GMM to (re)estimate , .
Return to
OUTER (GMM Step)
ff S s
IN
X ff
f
NER
f
(M) (M 1)t t
ˆ ˆstep or exit if - is sufficiently small.
step is straightforward - concave function (quadratic form) of a
concave function (logit probability).
Solving the step is time consuming INNER
f
GMM
f
(M)t
and very complicated.
Recent research has produced several alternative algorithms.
ˆOverall complication: The estimates can diverge.f
[Part 15] 17/24
Discrete Choice Modeling
Aggregate Share Data - BLP
ABLP Iteration
ξt is our ft. is our(β,)
No superscript is our (M); superscript 0 is our (M-1).