DP19021 Market Expansion and Business Stealing With Differentiated Products Using a Nested Logit
The nested logit model can overestimate the gains from the introduction of a new product. Our paper studies the market expansion and business stealing effects following the introduction of a new product in a market with highly substitutable differentiated goods. Central to our analysis is the parameter sigma, which quantifies the correlation in consumer's unobserved utility among same-nest products. We show that in markets with differentiated products, market expansion is feasible even when sigma tends to 1. We give the conditions under which new products lead to market expansion and/or business stealing effects, contingent on the value of sigma and product characteristics. Simulations illustrate our results and we discuss implications for empirical work.
