Journal
ECONOMETRICA
Volume 80, Issue 5, Pages 2231-2267Publisher
WILEY-BLACKWELL
DOI: 10.3982/ECTA8585
Keywords
Random coefficients logit demand; constrained optimization; numerical methods; dynamics
Categories
Funding
- Kilts Center for Marketing
- Neubauer Faculty Fund
- NSF [0721036, SES-0631622]
- Olin Foundation
- Stigler Center
- IBM Corporation Faculty Research Fund at the University of Chicago Booth School of Business
- Direct For Social, Behav & Economic Scie
- Divn Of Social and Economic Sciences [0721036] Funding Source: National Science Foundation
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The widely used estimator of Berry, Levinsohn, and Pakes (1995) produces estimates of consumer preferences from a discrete-choice demand model with random coefficients, market-level demand shocks, and endogenous prices. We derive numerical theory results characterizing the properties of the nested fixed point algorithm used to evaluate the objective function of BLP's estimator. We discuss problems with typical implementations, including cases that can lead to incorrect parameter estimates. As a solution, we recast estimation as a mathematical program with equilibrium constraints, which can be faster and which avoids the numerical issues associated with nested inner loops. The advantages are even more pronounced for forward-looking demand models where the Bellman equation must also be solved repeatedly. Several Monte Carlo and real-data experiments support our numerical concerns about the nested fixed point approach and the advantages of constrained optimization. For static BLP, the constrained optimization approach can be as much as ten to forty times faster for large-dimensional problems with many markets.
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