Structural Demand Model Research Articles

Economic Values of Coastal Erosion Management: Joint Estimation of Use and Passive Use Values With Recreation Demand and Contingent Valuation Data

Revealed and stated preference survey data from North Carolina households are utilized to estimate a joint structural microeconometric model of recreation demand and willingness-to-pay (WTP) for coastal erosion management among beach visitors and non-visitors. We test for and reject weak complementarity, implying existence of non-use values associated with management of North Carolina’s coastal resources. We find stronger preferences for shoreline retreat (median WTP = $22.20 per household, per year) as a management strategy relative to beach nourishment (WTP = $7.45) and substantially weaker preferences for shoreline armoring (WTP = $0.09). Shoreline retreat exhibits much larger estimates of non-use values, whereas non-use values for shoreline armoring are negative. Minimizing negative environmental impacts of erosion management increases WTP over 200%. Our data permit estimates of marginal value of incremental beach width accruing to beach users and non-users (which ranges from $0.23 and $0.47 per meter).

Measuring Willingness to Pay for Environmental Attributes in Seafood

We investigate whether consumers are willing to pay for sustainability in seafood. To do this, we estimate a logit random utility model (RUM) of seafood purchases using a product-level scanner dataset from a quasi-experimental setting that includes data both before and after the implementation of a seafood advisory and sustainability label. Each seafood product is defined as a bundle of attributes, including price, species, and sustainability rating. The sustainability rating is communicated to consumers through the use of a color-based traffic light label system, where a color rating is assigned to each seafood stock-keeping unit. Combining a structural demand model with a difference-in-differences approach allows us to take advantage of the implementation of the labeling treatment in a subset of stores in the local retail chain to estimate consumers’ willingness to pay (WTP) for green, yellow, and red sustainability labels. We find that the addition of a yellow sustainability label negatively impacts consumer’s WTP for seafood products, however this simple average effect does not fully capture many independent underlying mechanisms, such as consumer preferences for wild-caught versus farmed products, and the color-distribution of available labeled products within a species, which are empirically explored. Additional results from a second stage generalized least squares regression of RUM product fixed effects on product characteristics indicate that consumers prefer selective harvest methods, wild caught seafood, and U.S. caught seafood.

Housing match quality and demand: What can we learn from comparing buyer characteristics?

Match quality, the part of housing value to the buyer which is unique for each buyer-house match, is important in several housing market matching models, but measuring it is difficult. I suggest that similarity between buyers and sellers (at the time they bought) may be used to measure a part of match quality, which is correlated with buyer characteristics. If observable characteristics of a buyer are correlated with the buyer’s preferences for housing, successive owners of houses should share characteristics. A buyer could be expected to have higher match quality if similar to the previous buyer. I use a simple matching model to show this mechanism, and test this prediction using unique data with information on two “generations” of buyers. Buyers who resemble past buyers are paying more, also when a large number of observable housing, buyer and seller characteristics are controlled for. This supports the use of buyer similarity as a proxy for match quality. I use the match quality measure to indicate how search frictions affect the estimation of housing preferences in a structural housing demand model.

Store brands and retail grocery competition

AbstractGrocery retailers rank store brands as the most important factor that differentiates them from their competitors. Retailer competition should have a stronger impact on the more substitutable national brands than the more differentiated store brands. However, the literature has not studied the impacts empirically. In this paper, I quantify the different impacts of retailer competition on national brands and store brands using the scanner data of a U.S. chain retailer. I estimate a structural demand and supply model that incorporates the differentiation effect and retailer competition. The results show that national brand consumers are more likely to switch stores than store brands consumers. By analyzing two counterfactual cases, I find that 1) if the retailer did not sell store brands, its profit would decrease, and the loss would be greater in markets with more competitors; and 2) if the retailer competition had increased, then the national brands' retail prices would decrease more than the store brands' prices.

Unconventional energy, taxation, and interstate welfare: An analysis of Pennsylvania's severance tax policy

Natural gas production from unconventional sources has increased over the past decade. A significant portion of this increase has come from output in the Marcellus region of Pennsylvania. This output has altered gas markets and repositioned Pennsylvania as a major gas exporter. It has also put Pennsylvania at odds with other states as it is one of a few without a formal severance tax on extractive resources. In this paper, we combine results from a structural demand model with a two-sector trade model to analyze the interstate welfare impacts of Pennsylvania's current severance tax proposal. Our results demonstrate that most of the welfare losses from this proposed policy are likely to be shifted to residents in other states. We also demonstrate how fluctuations in gas prices can substantially reduce tax revenue. These findings have important implications for both Pennsylvania and U.S. energy policy given the significant rise in energy production from new sources throughout the U.S.

Demand Models for Differentiated Goods with Complementarity and Substitutability

We propose the Inverse Product Differentiation Logit (IPDL) model, a structural (inverse) demand model for differentiated products that captures market segmentation along several possibly overlapping dimensions. It generalizes the nested logit model to allow richer substitution patterns, including complementarity in demand, and can be estimated by linear instrumental variable regression using aggregate data. We use the IPDL model to estimate the demand for cereals in Chicago. We then extend it to a general demand model that is consistent with a utility model of heterogeneous and utility-maximizing consumers.

Pass-Through by Multi-Product Firms

How does cost pass-through to prices depend on the set of products a multi-product firm owns? Using a structural demand model for the Swedish beer market, we simulate equilibrium cost pass-through for varying counterfactual ownership patterns. We find that a firm with a larger number of products in its portfolio and a higher degree of substitutability among these products adopts a lower pass-through of costs. While the direction of results is robust, our simulations show that the muting effect on pass-through is limited when comparing pass-through by stand-alone firms to pass-through under the actual, moderately concentrated market structure.

Customer Preference and Station Network in the London Bike Share System

We study customer preference for the bike share system in the city of London. We estimate a structural demand model on the station network to learn the preference parameters and use the estimated model to provide insights on the design and expansion of the bike share system. We highlight the importance of network effects in understanding customer demand and evaluating expansion strategies of transportation networks. In the particular example of the London bike share system, we show that the currently implemented station density rule is far from ideal. We develop a new method to deal with the endogeneity problem of the choice set in estimating demand for network products. Our method can be applied to other settings, in which the available set of products or services depends on demand.

The Geography of Poverty and Nutrition: Food Deserts and Food Choices Across the United States

We study the causes of “nutritional inequality”: why the wealthy eat more healthfully than the poor in the United States. Exploiting supermarket entry, household moves to healthier neighborhoods, and purchasing patterns among households with identical local supply, we reject that neighborhood environments contribute meaningfully to nutritional inequality. Using a structural demand model, we find that exposing low-income households to the same products and prices available to high-income households reduces nutritional inequality by only nine percent, while the remaining 91 percent is driven by differences in demand. These findings counter the common notion that policies to reduce supply inequities, such as “food deserts,” could play an important role in reducing nutritional inequality. By contrast, the structural results predict that means-tested subsidies for healthy food could eliminate nutritional inequality at a fiscal cost of about 15 percent of the annual budget for the U.S. Supplemental Nutrition Assistance Program.

Leverage Regulation and Market Structure: An Empirical Model of the UK Mortgage Market

I develop a structural model of mortgage demand and lender competition to study how leverage regulation a ffects the equilibrium in the UK mortgage market. Using variation in risk-weighted capital requirements jointly across lenders and mortgages with di fferential loan-to-values, I show that a one-percentage-point increase in risk-weighted capital requirements increases lenders' marginal cost of originating mortgages by about 26 basis points (11 percent) for the average mortgage product. I use the estimated model to study proposed leverage regulations. Counterfactual analyses show that large lenders exploit a regulatory cost advantage, which increases concentration of mortgage originations by about 20 percent, and suggest that banning high loan-to-value mortgages may reduce large lenders' equity bu er.

The Conspicuous Consumption of the Poor: Forgoing Calories for Aspirational Goods

This paper investigates how inequality affects what the poor consider necessary to purchase. Using detailed information on the consumption choices of a large sample of poor households in India, we first provide evidence that inequality tends to make luxuries more necessary to the poor (their income elasticity decreases). We then estimate a structural model of demand where exposure to inequality affects the perceived needs of the poor, taking into account their supply environment. To account for the endogeneity between preferences and the income distribution, we rely on national inequality shocks that followed the 1991 economic liberalization reforms, and instrument local inequality using a shift-share strategy. We find that (1) inequality increases the perceived need of the poor for luxuries and (2) this preference shift generates significant expenditure reallocation at the expense of calorie intakes. On average, the calorie loss is about a fourth of the daily calorie intake.

Análisis empírico de los efectos económicos de la colusión: lecciones para Colombia

This paper empirically examines the economic effects of the so-called the baby diapers cartel in Colombia. We use data on quantities sold and unit prices of diapers at the region level in the period 2004-2016, and we carry out two exercises: first, following the line of analysis of the Colombian competition authority, we use time-series methods to analyze market prices between 2004 and 2016. Results suggest mixed evidence on the impact of the collusive behavior on the market. In a second exercise, we estimate a structural model of supply and demand that allows us to regain marginal costs and price-cost margins of the firms in the industry. Based on simulations of counterfactual scenarios ranging from more intense competition to perfect collusion, we show that the industry numbers in the cartel period are closer to a competitive scenario rather than to a collusive one. Our results suggest that a coordination failure between the firms in the cartel may have taken place.

How Well Do Structural Demand Models Work? Counterfactual Predictions in School Choice

Discrete choice demand models are widely used for counterfactual policy simulations, yet their out-of-sample performance is rarely assessed. This paper uses a large-scale policy change in Boston to investigate the performance of discrete choice models of school demand. In 2013, Boston Public Schools considered several new choice plans that differ in where applicants can apply. At the request of the mayor and district, we forecast the alternatives' effects by estimating discrete choice models. This work led to the adoption of a plan which significantly altered choice sets for thousands of applicants. Pathak and Shi (2014) update forecasts prior to the policy change and describe prediction targets involving access, travel, and unassigned students. Here, we assess how well these ex ante counterfactual predictions compare to actual outcome under the new choice sets. We find that a simple ad hoc model performs as well as the more complicated structural choice models for one of the two grades we examine. However, the structural models' inconsistent performance is largely due to prediction errors in applicant characteristics, which are auxiliary inputs. Once we condition on the actual applicant characteristics, the structural choice models outperform the ad hoc alternative in predicting both choice patterns and policy relevant outcomes. Moreover, refitting the models using the new choice data does not significantly improve their prediction accuracy, suggesting that the choice models are indeed “structural.” Our findings show that structural demand models can effectively predict counterfactual outcomes, as long there are accurate forecasts about auxiliary input variables.

The impact of India’s food security policy on domestic and international rice market

Food security policy making in India is at crossroads. India has emerged as a leading rice exporter. The Government of India has introduced the National Food Security Act which requires 33.6 million tons of rice per year for its public food distribution system. In this study, we modeled India’s rice market and analyzed policy implications of the long-term impact of India’s food security act on domestic and international rice market. We developed a structural economic demand and supply model for India’s rice market and further added subsidy equations to trace the consequence of National Food Security Act on domestic rice consumption and on the international market. We specifically focus on three different scenarios: subsidy as price effect, subsidy as inelastic income effect, and subsidy as elastic income effect under the broader framework of National Food Security Act. We found that at the end of the projection period (2024–2025), as a result of rice subsidy program, the consumption of rice increases significantly in the case of price effect while the inelastic income effect has no or less impact on production, consumption, and export of rice. Hence, the policy implication of our study is that if the objective of the National Food Security Act is to increase consumption then it needs to be implemented as price effect.

Demand for (Un)Biased News: Government Control in Online News Markets

We examine the nature of consumer demand for government-controlled online news outlets in Russia, testing whether such demand reflects a preference for pro-government ideological coverage, or other factors unrelated to outlets' ideological positions. We detect government-sensitive topics and measure outlets' news reporting decisions from news article texts, and estimate a structural model of demand for news using detailed browsing data that traces individual-level consumption. The average consumer has a distaste for pro-government ideology but a strong persistent taste for state-owned outlets, primarily driven by third-party referrals and non-sensitive news content. We discuss implications for online media control and media power.

Private Labels and Retailer Profitability: Bilateral Bargaining in the Grocery Channel

We examine the role of store branded products in determining bargaining outcomes between retailers and manufacturers in the single-serve brew-at-home coffee category. Exploiting a novel setting in which the dominant, single-serve technology was protected by a patent that prevented private label entry, we develop a structural model of demand and supply-side bargaining and seek to quantify the impact of private labels on retailer profits. To quantify the benefits of private label introduction, we decompose their impact into the direct profits (from adding an additional product) and the bargaining benefit on branded products (from increasing retailer's bargaining leverage), netting out the business stealing effects on incumbent branded products. We find that bargaining outcomes are driven primarily by bargaining leverage, while bargaining ability is relatively symmetric between retailer and manufacturer. Moreover, the impact of bargaining leverage is substantial: increased bargaining leverage accounts for roughly 20% of the overall benefit of private label introduction, which is itself on the order of 10% of pre-introduction profits. Finally, we find that private labels are beneficial to all retailers, but some retailers gain much more than others.

Consumer Stockpiling and Sales Promotions

In retailing markets of storable goods, consumer behavior is typically characterized by stockpiling. While existing research has developed rich models for such strategic consumer behavior, little is known about how sellers should ideally respond to it. In this paper, we provide insights into how frequency and depth of promotions affect consumer purchases and seller revenues in the long run. We show an application to the U.S. market for laundry detergent. We use estimates from a structural dynamic demand model to simulate different pricing policies and find that in the detergent market, an increase in promotion depth is more effective than a change in promotion length. Our results suggest that this finding can be translated to markets with a large heterogeneity in storage costs and steady consumption rates.

Parallel trade of pharmaceuticals: The Danish market for statins.

This paper investigates and quantifies the impact of parallel trade in markets for pharmaceuticals. The paper develops a structural model of demand and supply using data on price, sales, and the characteristics of statins in Denmark and simulates outcomes under a complete ban of parallel imports, keeping other regulatory schemes unchanged. There are two sets of key results. The first set focuses on price effects. On average, prices increase more in markets where the molecule has lost patent protection; wholesale prices for both generic and original products increase after competition from parallel importers is removed, but the final price paid by consumers (after deducting reimbursement) increases more for original products than for generics because most changes in wholesale prices are absorbed by the prevailing reimbursement rules. The second set of results reports the effects on market participants. My model takes into consideration consumers' preferences, allowing them to substitute between products. Prohibiting parallel imports induces consumers to substitute towards original products for which they have stronger preferences. In sum, banning parallel imports leads to (a) an increase in variable profits for original producers and a decrease for generic firms, (b) an increase in governmental health-care expenditures, and (c) a decrease in the welfare of Danish patients and firms.

An Econometric Assessment of Electricity Demand in the United States Using Utility-specific Panel Data and the Impact of Retail Competition on Prices

This paper uses a panel data of 72 U.S. electricity distribution companies during the period 1972-2009 to estimate structural demand and reduced-form price models. I find the own-price and income elasticity of demand for residential, commercial, and industrial customers that are generally consistent with the published economics literature. While static models work well for residential demand, dynamic models are more appropriate for the larger customer classes who require more time to adjust. Conditioning on the regressors, I find that residential and commercial electricity demand has been increasing slowly while industrial electricity demand and deflated electricity prices have been decreasing. In all price models I find that total factor productivity is consistently the most significant explanatory factor with a 1% increase in total factor productivity resulting in a reduction in deflated electricity prices ranging between 0.05% and 0.30%, depending on the model. Lastly, I find that retail electricity competition is associated with lower deflated electricity prices with the mean total impact being -4.3%, -8.2% and -11.1% for residential, commercial and industrial customers, respectively and with the impact diminishing over the sample period for residential customers, remaining relatively constant for commercial customers and increasing for industrial customers.

Why Outlet Stores Exist: Averting Cannibalization in Product Line Extensions

Outlet stores offer attractive prices at locations far from central shopping districts. They form a large and growing component of many firms’ retailing strategies, particularly in the fashion industry. I use a structural demand model to show that consumers are segmented according to their sensitivity to travel distance and taste for product newness. I then develop a supply model to predict product development responses to changes in store locations. Through policy simulations, I discover that the firm uses outlet stores to serve lower-value consumers who self-select by traveling to outlet stores from central shopping districts. The firm sells older, less desirable merchandise through outlet stores to prevent cannibalization of regular store revenues by means of exploiting the positive correlation between consumers’ travel sensitivity and taste for new products. I find that the rate of new product introduction in regular stores would fall by 16% if outlet stores were closed down, while variable profits would decline by 23%. These results imply that the existence of outlet stores may enable firms to improve quality in their regular channels, thus counteracting brand dilution effects. Data are available at https://doi.org/10.1287/mksc.2017.1031 .