NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Parallel Inverse Aggregate Demand Curves in Discrete Choice Models

Kory Kroft, René Leal Vizcaíno, Matthew J. Notowidigdo, Ting Wang

NBER Working Paper No. 27437
Issued in June 2020
NBER Program(s):Industrial Organization, Labor Studies, Public Economics

This paper highlights a previously-unnoticed property of commonly-used discrete choice models, which is that they feature parallel demand curves. Specifically, we show that in random utility models, inverse aggregate demand curves shift in parallel with respect to variety if and only if the random utility shocks follow the Gumbel distribution. Using results from Extreme Value Theory, we provide conditions for other distributions to generate parallel demands asymptotically, as the number of varieties increase. We establish these results in the benchmark case of symmetric products, illustrate them using numerical simulations and show that they hold in extended versions of the model with correlated tastes and asymmetric products. Lastly, we provide a “proof of concept” of parallel demands as an economic tool by showing how to use parallel demands to identify the change in consumer surplus from an exogenous change in product variety.

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Document Object Identifier (DOI): 10.3386/w27437

 
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