DP8862 Endogenous Product Choice: A Progress Report

Author(s): Gregory S. Crawford
Publication Date: February 2012
Keyword(s): Cable television, Endogenous product characteristics, Endogenous product choice, Endogenous quality, Orthogonal instruments, Welfare
JEL(s): C31, C52, L15, L40, L82
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8862

Empirical models of differentiated product demand are widely used by both academics and practitioners. While these methods treat carefully the potential endogeneity of price, until recently they have assumed the number and characteristics of the products offered by firms are exogenous. This paper presents a progress report on an ongoing research agenda to address this issue. First, it summarizes how the appropriate choice of 'orthogonal' instruments can yield consistent estimates of own and cross-price elasticities in the presence of endogenous product characteristics. Second, it summarizes how to measure 'quality markups' and the welfare consequences of endogenous product quality in U.S. cable television markets. Related papers and extensions to consider multiple product characteristics and dynamics are also discussed.