COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1744 Identification in Differentiated Products Markets Using Market Level Data Steven T. Berry and Philip A. Haile January 2010 We consider nonparametric identification in models of differentiated products markets,
using only market level observables. On the demand side we consider a nonparametric random
utility model nesting random coefficients discrete choice models widely used in applied
work. We allow for product/market-specific unobservables, endogenous product
characteristics (e.g., prices), and high-dimensional taste shocks with arbitrary
correlation and heteroskedasticity. On the supply side we specify marginal costs
nonparametrically, allow for unobserved firm heterogeneity, and nest a variety of
equilibrium oligopoly models. We pursue two approaches to identification. One relies on
instrumental variables conditions used previously to demonstrate identification in a
nonparametric regression framework. With this approach we can show identification of the
demand side without reference to a particular supply model. Adding the supply side allows
identification of firms' marginal costs as well. Our second approach, more closely linked
to classical identification arguments for supply and demand models, employs a change of
variables approach. This leads to constructive identification results relying on exclusion
and support conditions. Our results lead to a testable restriction that provides the first
general formalization of Bresnahan's (1982) intuition for empirically discriminating
between alternative models of oligopoly competition. |
