Estimating demand elasticities in a differentiated product industry: The personal computer market

Abstract

Supply and demand functions are typically estimated using uniform prices and quantities across products, but where products are heterogeneous, quality differences should be considered explicitly. This study employs hedonic coefficients to estimate price elasticities for differentiated products in the market for personal computers. The methodology allows for the estimation of varying demand elasticities among models. Instead of restricting market competition to the two nearest models, as is typically done in the differentiated-product literature, cross-elasticities of substitution have been allowed to decline continuously with distance between models in quality space. Estimated demand elasticities are consistent with observed changes in market structure. Entrant firms and new models face more elastic demand.