Research / BFI Working PaperDec 06, 2021

Incorporating Search and Sales Information in Demand Estimation

Ali Hortaçsu, Olivia R. Natan, Hayden Parsley, Timothy Schwieg, Kevin R. Williams

We propose an approach to modeling and estimating discrete choice demand that allows for a large number of zero sale observations, rich unobserved heterogeneity, and endogenous prices. We do so by modeling small market sizes through Poisson arrivals. Each of these arriving consumers then solves a standard discrete choice problem. We present a Bayesian IV estimation approach that addresses sampling error in product shares and scales well to rich data environments. The data requirements are traditional market-level data and measures of consumer search intensity. After presenting simulation studies, we consider an empirical application of air travel demand where product-level sales are sparse. We find considerable variation in demand over time. Periods of peak demand feature both larger market sizes and consumers with higher willingness to pay. This amplifies cyclicality. However, observed frequent price and capacity adjustments offset some of this compounding effect.

More Research From These Scholars

BFI Working Paper Apr 18, 2019

The Production, Relocation, and Price Effects of US Trade Policy: The Case of Washing Machines

Aaron Flaaen, Ali Hortaçsu, Felix Tintelnot
Topics:  Industrial Organization, Tax & Budget
BFI Working Paper Apr 23, 2021

Financial Fragility in the COVID-19 Crisis: The Case of Investment Funds in Corporate Bond Markets

Antonio Falato, Itay Goldstein, Ali Hortaçsu
Topics:  COVID-19, Financial Markets
BFI Working Paper Nov 29, 2021

Empirical Perspectives on Auctions

Ali Hortaçsu, Isabelle Perrigne
Topics:  Industrial Organization