Discussion paper

DP15630 Blurred boundaries: a flexible approach for segmentation applied to the car market

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.

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Citation

Grigolon, L (2021), ‘DP15630 Blurred boundaries: a flexible approach for segmentation applied to the car market‘, CEPR Discussion Paper No. 15630. CEPR Press, Paris & London. https://cepr.org/publications/dp15630