Blurred boundaries: A flexible approach for segmentation applied to the car market

Prominent features of differentiated product markets are segmentation and product proliferation blurring the boundaries between segments. I develop a tractable demand model, the Ordered Nested Logit, which allows for asymmetric substitution between segments. I apply the model to the automobile market where segments are ordered from small to luxury. I find that consumers, when substituting outside their vehicle segment, are more likely to switch to a neighboring segment. Accounting for such asymmetric substitution matters when evaluating the impact of new product introduction or the effect of subsidies on fuel-efficient cars.

Automated summary

The study's model reveals that in differentiated product markets, consumers tend to switch to neighboring segments when substituting products. Therefore, it is important to consider the impact of asymmetric substitution when evaluating the effects of new product introductions or subsidies on fuel-efficient vehicles.