Incorporating Search and Sales Information in Demand Estimation

61 Pages Posted: 7 Dec 2021

See all articles by Ali Hortaçsu

Ali Hortaçsu

University of Chicago; National Bureau of Economic Research (NBER)

Olivia Natan

University of California, Berkeley

Hayden Parsley

The University of Texas at Austin

Timothy Schwieg

University of Chicago - Department of Economics

Kevin Williams

Yale School of Management; Yale University - Cowles Foundation

Multiple version iconThere are 2 versions of this paper

Date Written: December 6, 2021

Abstract

We propose an approach to modeling and estimating discrete choice demand that allows for a large number of zero sale observations, rich unobserved heterogeneity, and endogenous prices. We do so by modeling small market sizes through Poisson arrivals. Each of these arriving consumers then solves a standard discrete choice problem. We present a Bayesian IV estimation approach that addresses sampling error in product shares and scales well to rich data environments. The data requirements are traditional market-level data and measures of consumer search intensity. After presenting simulation studies, we consider an empirical application of air travel demand where product-level sales are sparse. We find considerable variation in demand over time. Periods of peak demand feature both larger market sizes and consumers with higher willingness to pay. This amplifies cyclicality. However, observed frequent price and capacity adjustments offset some of this compounding effect.

JEL Classification: C10,C11,C13,C18,L93

Suggested Citation

Hortaçsu, Ali and Natan, Olivia and Parsley, Hayden and Schwieg, Timothy and Williams, Kevin, Incorporating Search and Sales Information in Demand Estimation (December 6, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-144, Available at SSRN: https://ssrn.com/abstract=3979077 or http://dx.doi.org/10.2139/ssrn.3979077

Ali Hortaçsu (Contact Author)

University of Chicago ( email )

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National Bureau of Economic Research (NBER)

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Olivia Natan

University of California, Berkeley ( email )

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Berkeley, CA 94720
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Hayden Parsley

The University of Texas at Austin ( email )

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Timothy Schwieg

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
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Kevin Williams

Yale School of Management ( email )

New Haven, CT 06520
United States

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Yale University - Cowles Foundation ( email )

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New Haven, CT 06520-8281
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