Estimation of Random Coefficients Logit Demand Models with Interactive Fixed Effects
We extend the Berry, Levinsohn and Pakes (BLP, 1995) random coefficients discrete- choice demand model, which underlies much recent empirical work in IO. We add interactive fixed effects in the form of a factor structure on the unobserved product characteristics. The interactive fixed effects can be arbitrarily correlated with the observed product characteristics (including price), which accommodates endogeneity and, at the same time, captures strong persistence in market shares across products and markets. We propose a two step least squares-minimum distance (LS-MD) procedure to calculate the estimator. Our estimator is easy to compute, and Monte Carlo simulations show that it performs well. We consider an empirical application to US automobile demand.
We are grateful for comments from the participants of the 2009 All-UC Econometrics Conference and of the econometrics seminar at Georgetown University. We also thank Han Hong, Sung Jae Jun and Jinyong Hahn for very helpful discussions. Moon acknowledges the NSF for financial support via SES 0920903.
Submitted - sswp1325.pdf