Measuring Substitution Patterns in Differentiated Products Industries
We study the estimation of substitution patterns within the discrete choice framework developed by Berry (1994) and Berry, Levinsohn, and Pakes (1995). Our objective, is to illustrate the consequences of using weak instruments in this non-linear GMM context, and propose a new class of instruments that can be used to estimate a large family of models with aggregate data. We argue that relevant instruments should reflect the (exogenous) degree of differentiation of each product in a market (Differentiation IVs), and provide a series of examples to illustrate the performance of simple instrument functions.
This research has benefited from the financial support of the NSF (SES-1530788). We thank the many seminar participants who have provided feedback on this paper. The paper also greatly benefited from discussions with Nikhil Agarwal, Steve Berry, Chris Conlon, Robert Clark, Joachim Freyberger, Paul Greico, Panle Jia Barwick, Robin Lee, Aviv Nevo, Ariel Pakes, Amil Petrin, Katja Seim, and Chris Sullivan. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.