COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1744R Identification in Differentiated Products Markets Using Market Level Data Steven T. Berry and Philip A. Haile January 2010 We present new identification results for nonparametric models of
differentiated products markets, using only market level observables. We specify a
nonparametric random utility discrete choice model of demand allowing rich preference
heterogeneity, product/market unobservables, and endogenous prices. Our supply model
posits nonparametric cost functions, allows latent costs shocks, and nests a range of
standard oligopoly models. We consider identification of demand, identification of changes
in aggregate consumer welfare, identification of marginal costs, identification of firms'
marginal cost functions, and discrimination between alternative models of firm conduct. We
explore two complementary approaches. The first demonstrates identification under the same
nonparametric instrumental variables conditions required for identification of regression
models. The second treats demand and supply in a system of nonparametric simultaneous
equations, leading to constructive proofs exploiting exogenous variation in demand
shifters and cost shifters. We also derive testable restrictions that provide the first
general formalization of Bresnahan's (1981, 1982) intuition for empirically distinguishing
between alternative models of oligopoly competition. From a practical perspective, our
results clarify the types of instrumental variables needed with market level data,
including tradeoffs between functional form and exclusion restrictions. |
