Blurred Boundaries: A Flexible Approach for Segmentation Applied to the Car Market

Abstract

Prominent features of differentiated product markets are segmentation and product proliferation that blurs the boundaries between segments. I develop a tractable demand model,the Ordered Nested Logit, which allows for over lap between neighboring 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 a symmetric substitution matters when evaluating the impact of new product introduction or studying the effect of subsidies on fuel-efficient cars.