Columbia Business School
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New York, NY 10027
Institutional Affiliation: Columbia Business School
NBER Working Papers and Publications
|September 2019||State-Dependent Demand Estimation with Initial Conditions Correction|
with Jean-Pierre H. Dubé, Günter J. Hitsch, Peter E. Rossi: w26217
We analyze the initial conditions bias in the estimation of brand choice models with structural state dependence. Using a combination of Monte Carlo simulations and empirical case studies of shopping panels, we show that popular, simple solutions that mis-specify the initial conditions are likely to lead to bias even in relatively long panel datasets. The magnitude of the bias in the state dependence parameter can be as large as a factor of 2 to 2.5. We propose a solution to the initial conditions problem that samples the initial states as auxiliary variables in an MCMC procedure. The approach assumes that the joint distribution of prices and consumer choices, and hence the distribution of initial states, is in equilibrium. This assumption is plausible for the mature consumer packaged good...