Journal of Economic Literature (JEL) Code(s)
C11, C18, L93
We propose a demand estimation method that allows for a large number of zero sale observations, rich unobserved heterogeneity, and endogenous prices. We do so by modeling small market sizes through Poisson arrivals. Each of these arriving consumers solves a standard discrete choice problem. We present a Bayesian IV estimation approach that addresses sampling error in product shares and scales well to rich data environments. The data requirements are traditional market-level data as well as a measure of market sizes or consumer arrivals. After presenting simulation studies, we demonstrate the method in an empirical application of air travel demand.
Hortaçsu, Ali; Natan, Olivia R.; Parsley, Hayden; Schwieg, Timothy; and Williams, Kevin R., "Demand Estimation with Infrequent Purchases and Small Market Sizes" (2023). Cowles Foundation Discussion Papers. 2767.