What difference does dynamics make? The case of digital cameras

Abstract

When the well-known BLP model is applied to products with rapid technological changes and declining prices it tends to yield implausible results. A sequence of increasingly sophisticated dynamic demand models, most recently Gowrisankaran and Rysman (2009, hereafter GR), have been developed to overcome these problems. We apply both models to new data on the US digital camera market. In addition, we demonstrate that the GR model can be specified as a BLP model plus an additional set of terms. This suggests that a dynamic model can be estimated as a BLP model plus a non-parametric function which is less computationally demanding. As a first step to implementing this semi-parametric approach we estimate a BLP model augmented with age as a proxy for the non-parametric component. We find that demand for digital cameras is more elastic when demand dynamics is accounted for in both the dynamic model and the BLP model with the age proxy. This suggests that the market is more competitive though the results are consistent with firms engaging in intertemporal price discrimination. Merger simulations predict the lowest price and quantity changes using the GR model.