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Logit Demand Estimation under Competitive Pricing Behavior: An Equilibrium Framework
David Besanko, Sachin Gupta and Dipak Jain
Vol. 44, No. 11, Part 1 of 2 (Nov., 1998), pp. 1533-1547
Published by: INFORMS
Stable URL: http://www.jstor.org/stable/2634898
Page Count: 15
You can always find the topics here!Topics: Brands, Prices, Market prices, Market share, Coefficients, Cost estimates, Ketchup, Consumer prices, Retail stores, Estimation bias
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Discrete choice models of demand have typically been estimated assuming that prices are exogenous. Since unobservable (to the researcher) product attributes, such as coupon availability, may impact consumer utility as well as price setting by firms, we treat prices as endogenous. Specifically, prices are assumed to be the equilibrium outcomes of Nash competition among manufacturers and retailers. To empirically validate the assumptions, we estimate logit demand systems jointly with equilibrium pricing equations for two product categories using retail scanner data and cost data on factor prices. In each category, we find statistical evidence of price endogeneity. We also find that the estimates of the price response parameter and the brand-specific constants are generally biased downward when the endogeneity of prices is ignored. Our framework provides explicit estimates of the value created by a brand, i.e., the difference between consumers' willingness to pay for a brand and its cost of production. We develop theoretical propositions about the relationship between value creation and competitive advantage for logit demand systems and use our empirical results to illustrate how firms use alternative value creation strategies to accomplish competitive advantage.
Management Science © 1998 INFORMS