It’s official! NSF will fund our project “Measuring substitution patterns and market power in differentiated product industries”, co-authored with Amit Gandhi. A draft of the first paper will be posted soon. An incomplete version is available upon request.
Since pictures speak louder than words, here is a cool graph illustrating the consequences of using weak instruments to estimate mixed-logit models with aggregate data. The histogram corresponds to the Monte-Carlo distribution of parameter estimates obtained using the standard instruments used in the literature (e.g. number of competing products and sum of characteristics). The two densities use instruments based on exogenous measures of product differentiation: Differentiation IV’s.