Estimation of random coefficient demand models
Subtitle: challenges, difficulties and warnings
By: Christopher R. Knittel, Konstantinos Metaxoglou.
Contributors: Metaxoglou, Konstantinos.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 14080; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 14080.
Publisher: National Bureau of Economic Research
Published: 2008
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "Empirical exercises in economics frequently involve estimation of highly nonlinear models.  The criterion function may not be globally concave or convex and exhibit many local extrema.  Choosing among these local extrema is non-trivial for a variety of reasons.  In this paper, we analyze the sensitivity of parameter estimates, and most importantly of economic variables of interest, to both starting values and the type of non-linear optimization algorithm employed.  We focus on a class of demand models for differentiated products that have been used extensively in industrial organization, and more recently in public and labor.  We find that convergence may occur at a number of local extrema, at saddles and in regions of the objective function where the first-order conditions are not satisfied.  We find own- and cross-price elasticities that differ by a factor of over 100 depending on the set of candidate parameter estimates.  In an attempt to evaluate the welfare effects of a change in an industry's structure, we undertake a hypothetical merger exercise.  Our calculations indicate consumer welfare effects can vary between positive values to negative seventy billion dollars depending on the set of parameter estimates used"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 7/14/2008.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.