TY - JOUR
AU - Knittel,Christopher R.
AU - Metaxoglou,Konstantinos
TI - Estimation of Random Coefficient Demand Models: Challenges, Difficulties and Warnings
JF - National Bureau of Economic Research Working Paper Series
VL - No. 14080
PY - 2008
Y2 - June 2008
DO - 10.3386/w14080
UR - http://www.nber.org/papers/w14080
L1 - http://www.nber.org/papers/w14080.pdf
N1 - Author contact info:
Christopher R. Knittel
MIT Sloan School of Management
100 Main Street, E62-513
Cambridge, MA 02142
E-Mail: knittel@mit.edu
Konstantinos Metaxoglou
Carleton University
E-Mail: konstantinos.metaxoglou@carleton.ca
AB - 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.
ER -