Parallel Inverse Aggregate Demand Curves in Discrete Choice Models / Kory Kroft, René Leal Vizcaíno, Matthew J. Notowidigdo, Ting Wang.

Format:

Book

Author/Creator:

Kroft, Kory.

Contributor:

National Bureau of Economic Research.

Leal Vizcaíno, René.

Notowidigdo, Matthew J.

Wang, Ting.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27437.

NBER working paper series no. w27437

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

This paper highlights a previously-unnoticed property of commonly-used discrete choice models, which is that they feature parallel demand curves. Specifically, we show that in random utility models, inverse aggregate demand curves shift in parallel with respect to variety if and only if the random utility shocks follow the Gumbel distribution. Using results from Extreme Value Theory, we provide conditions for other distributions to generate parallel demands asymptotically, as the number of varieties increase. We establish these results in the benchmark case of symmetric products, illustrate them using numerical simulations and show that they hold in extended versions of the model with correlated tastes and asymmetric products. Lastly, we provide a "proof of concept" of parallel demands as an economic tool by showing how to use parallel demands to identify the change in consumer surplus from an exogenous change in product variety.

Notes:

Print version record

June 2020.