DP15630 Blurred boundaries: a flexible approach for segmentation applied to the car market
|Publication Date:||January 2021|
|JEL(s):||D11, D12, L62, M3|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=15630|
Prominent features of differentiated product markets are segmentation and product proliferation blurring the boundaries between segments. I develop a tractable demand model, the Ordered Nested Logit, which allows for asymmetric substitution between segments. I apply the model to the automobile market where segments are ordered from small to luxury. I find that consumers, when substituting outside their vehicle segment, are more likely to switch to a neighboring segment. Accounting for such asymmetric substitution matters when evaluating the impact of new product introduction or the effect of subsidies on fuel-efficient cars.