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47757: Structural Models and Empirical Methods

Hui Li
October 18, 2017

*Previously offered under the course title 47756-Empirical Models in Marketing in mini
3, Spring 2016.

1 Course Description

This course focuses on empirical structural models and their applications in Marketing,
Economics, and Information Systems. The goal is to help students build up necessary toolk-
its and provide hands-on experience of applying structural models to empirical researches
by combining theories, numerical methods, and applications. The topics that will be cov-
ered include static discrete choice models, demand estimation using aggregate data (BLP),
single-agent dynamic discrete choice models, static and dynamic discrete games, and their
applications including storable good and durable good demand, price discrimination, prod-
uct innovation, and two-sided platforms. The course will also discuss research methodologies
related to computational methods (e.g., function approximation, numerical integration) and
econometric analysis. The techniques can be applied to Marketing, Economics (IO, Public,
and Labor) and Information Systems.

2 Evaluation

The requirements of the course are summarized as followed:

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1. One computer assignment.
2. One paper presentation.

3 Schedule

Week Date Topic

1 10/23 Aggregate Demand Models/BLP (I)

10/25 Aggregate Demand Models/BLP (II)

2 10/30 Student presentation and paper discussion

11/1 Single-Agent Dynamics (I)

3 11/6 Single-Agent Dynamics (II)

11/8 Single-Agent Dynamics (III)

4 11/13 Student presentation and paper discussion

11/15 Discrete Games (I)

5 11/20 Discrete Games (II)

11/22 Thanksgiving break, no class

6 11/27 Student presentation and paper discussion

11/29 Price Discrimination

7 12/4 Student presentation and paper discussion

12/6 Student presentation and paper discussion

4 Reference

4.1 Aggregate Demand Models/BLP

Static Discrete Demand and Supply Models of Product Differentiation:

Berry, S. (1994), Estimating Discrete-Choice Models of Product Differentiation, Rand Jour-

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nal of Economics, 25(2), 242-262.
Berry, S, Levinsohn, J. and A. Pakes (1995), Automobile Prices in Equilibrium, Economet-
rica, 63(4), 841-890.
Berry, S., Linton, O. and A. Pakes (2004), Limit Theorems for Estimating the Parameters
of Differentiated Product Demand Models, Review of Economic Studies, 71(3), 613-654.
Berry, S., J. Levinsohn, and A. Pakes, (2004): Differentiated Product Demand Systems
From a Combination of Micro and Macro Data: The New Car Market, Journal of Political
Economy, 112(1), 68-104.
Imbens, G. and J. Woolridge (2007), Discrete Choice, NBER Lecture Notes 11. Available
at http://www.nber.com/minicourse3.html
Steven Berry and Philip Haile (2011) Identification in Differentiated Products Markets Using
Market Level Data. Working Paper.

Applications and extensions :

1. Aggregate data augmented with micro data:


Chintagunta, P. K., and Dub, J.-P. (2005), "Estimating a Stockkeeping-Unit-Level Brand
Choice Model That Combines Household Panel Data and Store Data." Journal of Marketing
Research, 2005, 42(3), pp. 368-79.
Berry, S., James A. Levinsohn, and A. Pakes. (2004). "Differentiated Products Demand
Systems From a Combination of Micro and Macro Data: the New Car Market." Journal of
Political Economy, 112(1): 68-105.
Luan, J., K. Sudhir (2010) Forecasting Marketing-Mix Responsiveness for New Products.
Journal of Marketing Research: June 2010, Vol. 47, No. 3, pp. 444-457.
Petrin, A. (2002), "Quantifying The Benefits Of New Products: The Case Of The Minivan,"
Journal of Political Economy, 2002, v110(4,Aug), 705-729.
Albuquerque, P. and Bronnenberg, B. (2009), Estimating Demand Heterogeneity Using Ag-
gregated Data. Marketing Science 28(2), pp. 356372

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2. Multiple discreteness and complementarities:
Hendel, I. (1999, Apr.). Estimating multiple-discrete choice models: An application to
comput- erization returns. Review of Economic Studies 66 (2), 423446.
Gentzkow, M. (2007, June). Valuing new goods in a model with complementarities: Online
newspapers. American Economic Review 97 (3).
3. Network goods :
Rysman, M. (2004). Competition between networks: A study of the market for yellow pages,.
Review of Economic Studies 71, 483512.
Ackerberg, D. and G. Gowrisankaran (2006). Quantifying equilibrium network externalities
in the ACH banking industry. RAND Journal of Economics 37, 73861.
4. Hedonic and housing markets:
Bajari, P. and L. Benkard (2005). Demand estimation with heterogeneous consumers and
un- observed product characteristics: A hedonic approach. Journal of Political Economy 113
(6), 12391276.
Bayer, P., F. Ferreira, and R. McMillan (2007). A unified framework for measuring prefer-
ences for schools and neighborhoods. Journal of Political Economy 115 (5), 588638.
Bajari, P. and M. E. Kahn (2005). The private and social costs of urban sprawl: The lot
size versus commuting tradeoff. Journal of Business & Economic Statistics 23 (1), 2035.

4.2 Single-Agent Dynamics

Theory of dynamic decision processes

Bertsekas, D. P. (2005): Dynamic Programming and Optimal Control: 2nd Edition (Volumes
1 and 2). Athena Scientific
Miao, Jianjun (2014): Economic Dynamics in Discrete Time. MIT Press
Puterman, M. L. (1994): Markov Decision Processes. Wiley-Interscience
Rust, J. (1996): Numerical Dynamic Programming in Economics, in Handbook of Com-

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putational Economics, ed. by H. M. Amman, D. A. Kendrick, and J. Rust: Elsevier Science
B.V., 619-729
Stokey, N. L., R. E. Lucas, and E. C. Prescott (1989): Recursive Methods In Economic
Dynamics. Harvard University Press

Dynamic discrete choice models

Aguirregabiria, V. and Mira, P. (2010): Dynamic discrete choice structural models: A


survey, Journal of Econometrics, 156, 38-67
Miller, R. A. (1984): Job Matching and Occupational Choice, Journal of Political Economy,
92(6), 1086-1120
Pakes, A. (1986): Patents as Options: Some Estimates of the Value of Holding European
Patent Stocks, Econometrica, 54(4), 755-784
Rust, J. (1987): Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold
Zurcher, Econometrica, 55(5), 999-1033
Rust, J. (1994): Structural Estimation of Markov Decision Processes, in Handbook of
Econometrics, ed. by R. F. Engle, and D. L. McFadden. London and New York: Elsevier
North-Holland, 3081-3143
Wolpin, K. I. (1984): An Estimable Dynamic Stochastic Model of Fertility and Child Mor-
tality, Journal of Political Economy, 92(5), 852-874

Numerical analysis

Judd, K. L. (1998): Numerical Methods in Economics. Cambridge: MIT Press


Press, W. H., S. A. Teukolsky, W. T. Vetterling, And B. P. Flannery (2002): Numerical
Recipes In C++. Cambridge University Press
Rust, J. (1996): Numerical Dynamic Programming in Economics, in Handbook of Com-
putational Economics, ed. by H. M. Amman, D. A. Kendrick, and J. Rust: Elsevier Science
B.V., 619-729

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Ueberhuber, C. W. (1997): Numerical Computation: Methods, Software, and Analysis (Vol-
umes 1 and 2). Springer Verlag
Bentez-Silva, H., G. Hall, G. J. Hitsch, G. Pauletto, and J. Rust (2001): A Comparison of
Discrete And Parametric Approximation Methods For Continuous-State Dynamic Program-
ming Problems, manuscript

Dynamic discrete choice models: Applications

1. Bayesian learning
1.1 Origins of the modern literature
Eckstein, Z., D. Horsky, and Y. Raban (1988): An Empirical Dynamic Model of Optimal
Brand Choice, manuscript (Foerder Institute for Economic Research, Tel Aviv University)
Roberts, J. H., and G. L. Urban (1988): Modeling Multiattribute Utility, Risk, and Belief
Dynamics for New Consumer Durable Brand Choice, Management Science, 34(2), 167185
1.2 The modern standard dynamic discrete choice learning model
Erdem, T., and M. P. Keane (1996): Decision-Making Under Uncertainty: Capturing Dy-
namic Brand Choice Processes in Turbulent Consumer Goods Markets, Marketing Science,
15(1), 120
Crawford, G. S., and M. Shum (2005): Uncertainty and Learning in Pharmaceutical De-
mand, Econometrica, 73(4), 11371173
1.3 Understanding forward-looking learning and option values
Hitsch, G. J. (2006): An Empirical Model of Optimal Dynamic Product Launch and Exit
Under Demand Uncertainty, Marketing Science, 25(1), 2550
1.4 Empirical/identification challenges
Shin, S., S. Misra, and D. Horsky (2012): Disentangling Preferences and Learning in Brand
Choice Models, Marketing Science, 31(1), 115137
2. Storable goods demand
2.1 Dynamic discrete choice models of storable goods demand

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Erdem, T., S. Imai, and M. P. Keane (2003): Brand and Quantity Choice Dynamics Under
Price Uncertainty, Quantitative Marketing and Economics, 1, 564
Hendel, I., and A. Nevo (2006): Measuring the Implications of Sales and Consumer Inventory
Behavior, Econometrica, 74(6), 16371673
2.2 Understanding retail promotions and empirical evidence on the effects of promotions
Pesendorfer, M. (2002): Retail Sales: A Study of Pricing Behavior in Supermarkets, Journal
of Business, 75(1), 3366
Hendel, I., and A. Nevo (2006): Sales and consumer inventory, RAND Journal of Eco-
nomics, 37(3), 543561
3. Durable goods demand
3.1 First dynamic discrete choice formulation, focus on state space simplification
Melnikov, O. (2013): Demand for Differentiated Durable Products: The Case of the U.S.
Computer Printer Market, Economic Inquiry, 51(2), 12771298
3.2 Individual level data
Song, I., and P. K. Chintagunta (2003): A Micromodel of New Product Adoption with Het-
erogeneous and Forward-Looking Consumers: Application to the Digital Camera Category,
Quantitative Marketing and Economics, 1, 371407
3.3 Supply side implicationspricing in the presence of dynamic durable goods demand
Nair, H. S. (2007): Intertemporal Price Discrimination with Forward-Looking Consumers:
Application to the US Market for Console Video-Games, Quantitative Marketing and Eco-
nomics, 5, 239292
3.4 Replacement
Gordon, B. R. (2009): A Dynamic Model of Consumer Replacement Cycles in the PC
Processor Industry, Marketing Science, 28(5), 846867
3.5 State-of-the-art approach, integrates key model elements in a dynamic BLP model
Gowrisankaran, G., and M. Rysman (2012): Dynamics of Consumer Demand for New
Durable Goods, Journal of Political Economy, 120(6), 11731219

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4. Other applications of dynamic discrete choice
4.1 Demand when consumers face a loyalty program (switching costs)
Hartmann, W. R., and V. B. Viard (2008): Do frequency reward programs create switch-
ing costs? A dynamic structural analysis of demand in a reward program, Quantitative
Marketing and Economics, 6(2), 109137
4.2 Search
Seiler, S. (2013), The Impact of Search Costs on Consumer Behavior: A Dynamic Ap-
proach, Quantitative Marketing and Economics, 11 (2), 155-203
4.3 Intertemporal substitution because of diminished marginal utility after consumption
Hartmann, W. R. (2006): Intertemporal Effects of Consumption and Their Implications for
Demand Elasticity Estimates, Quantitative Marketing and Economics, 4, 325-349
4.4 Entry
Holmes, T. (2010): Diffusion of Wal-Mart and Economies of Density, Econometrica, 79,
253-302.

Estimation and Identification

Abbring, J. H. (2010): Identification of Dynamic Discrete Choice Models, Annual Review


of Economics, 2, 367-394
Arcidiacono, P., and P. E. Ellickson (2011): Practical Methods for Estimation of Dynamic
Discrete Choice Models, Annual Review of Economics, 3, 363-394
Ackerberg, D. A. (2009): "A new use of importance sampling to reduce computational burden
in simulation estimation," Quantitative Marketing and Economics, 7(4), 343-376
Aguirregabiria, V. and Mira, P. (2010): Dynamic discrete choice structural models: A
survey, Journal of Econometrics, 156, 38-67
Aguirregabiria, V. and Mehra, P. (2002), Swapping the Nested Fixed Point Algorithm: A
Class of Estimators for Discrete Markov Decision Models, Econometrica, 70, 1519-1543.
Dub, J.-P., Hitsch, G. J., and Jindal, P. (2014): The Joint Identification of Utility and

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Discount Functions from Stated Choice Data: An Application to Durable Goods Adoption,
Quantitative Marketing and Economics, 12 (4), 331-377
Fang, H., and Y. Wang (2014): Estimating Dynamic Discrete Choice Models with Hyperbolic
Discounting, with an Application to Mammography Decisions, manuscript
Heckman, J. (1981): The Incidental Parameters Problem and the Problem of Initial Condi-
tions in Estimating a Discrete Time-Discrete Data Stochastic Process, in C. Manski and D.
L. McFadden (eds.): Structural Analysis of Discrete Data with Econometric Applications.
MIT Press
Hotz, J. V., and R. A. Miller (1993): Conditional Choice Probabilities and the Estimation
of Dynamic Models, Review of Economic Studies, 60, 497-529
Hotz, V. J., R. A. Miller, S. Sanders, and J. Smith (1994). A simulation estimator for
dynamic models of discrete choice. The Review of Economic Studies 61 (2), 265- 289.
Magnac, T. and Thesmar, D. (2002): Identifying Dynamic Discrete Decision Processes,
Econometrica, 70(2), 801-816
Reiss, P. C., and F. A. Wolak (2007): Structural Econometric Modeling: Rationales and
Examples from Industrial Organization, in Handbook of Econometrics, Vol. 6A, ed. by J.
J. Heckman and E. E. Leamer. Elsevier B. V.
Rust, J. (1987): Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold
Zurcher, Econometrica, 55 (5), 999-1033
Rust, J. (1994): Structural Estimation of Markov Decision Processes, in Handbook of
Econometrics, Vol. IV, ed. by R. F. Engle and D. L. McFadden. Amsterdam and New York:
North-Holland
Su, C.-L., and K. L. Judd (2012): Constrained Optimization Approaches to Estimation of
Structural Models, Econometrica, 80(5), 2213-2230
Yao, S., C. F. Mela, J. Chiang, and Y. Chen (2012): Determining Consumers Discount
Rates with Field Studies, Journal of Marketing Research, 49(6), 822-841

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Other Estimation Approaches (Two-Step, Bayesian, ...)

Aguirregabiria, V., and P. Mira (2002): Swapping the Nested Fixed Point Algorithm: A
Class of Estimators for Discrete Markov Decision Models, Econometrica, 70 (4), 1519-1543
Aguirregabiria, V. and Mira, P. (2007): Sequential Estimation of Dynamic Discrete Games,
Econometrica, 75(1), 1-53
Arcidiacono, P. and Miller, R. (2008): CCP Estimation of Dynamic Discrete Choice Models
with Unobserved Heterogeneity, manuscript
Bajari, P., L. Benkard, and J. Levin (2007): Estimating Dynamic Models of Imperfect
Competition, Econometrica, 75 (5), 13311370
Imai, S., Jain, N., and Ching, A. (2009): Bayesian Estimation of Dynamic Discrete Choice
Models, Econometrica, 77(6), 1865-1899
Norets, A. (2009): Inference in Dynamic Discrete Choice Models With Serially Correlated
Unobserved State Variables, Econometrica, 77(5), 1665-1682
Pesendorfer, M. and Schmidt-Dengler, P. (2008): Asymptotic Least Squares Estimators for
Dynamic Games, Review of Economic Studies, 75, 901-928

4.3 Discrete Games

Static Discrete Games: Entry and Exit, Product Positioning

1. Models with unique predictions:


Bresnahan, T. F. and P. C. Reiss (1987). Do entry conditions vary across markets? Brookings
Papers on Economic Activity 1987 (3, Special Issue On Microeconomics), 833881. Bresna-
han, T. F. and P. C. Reiss (1990). Entry in monopoly markets. The Review of Economic
Studies 57 (4), 531553.
Breshnahan, T. and P. Reiss (1991), Entry in Monopoly Markets, Review of Economic
Studies, 57 (4) 57-81.

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Berry, S. (1992), Estimation of a Model of Entry in the Airline Industry, Econometrica, 60
(4), 889-917.
Berry, Steven and Reiss, Peter (2006), Empirical Models of Entry and Market Structure,
Chapter for Volume III of the Handbook of Industrial Organization.
Seim, K. (2006), An Empirical Model of Firm Entry with Endogenous Product-Type Choices,
RAND Journal of Economics 37(3), 2006.
Berry, S. T. and J. Waldfogel (1999). Free entry and social inefficiency in radio broad-
casting. The Rand Journal of Economics 30 (3), 397420.
Mazzeo, M. (2001). Product choice and oligopoly market structure. Rand Journal of Eco-
nomics, 33(2):221-242.
2. Models with multiple equilibria:
Tamer, E. (2003), Incomplete Simultaneous Discrete Response Model with Multiple Equi-
libria, Review of Economic Studies, 70(1), 147-165.
Sweeting, A. (2009), The Strategic Timing of Radio Commercials: An Empirical Analysis
Using Multiple Equilibria, RAND Journal of Economics, 40(4).
Ciliberto, F. and E. Tamer (2009), Market Structure and Multiple Equilibria in Airline
Markets, Econometrica, Vol. 77, Issue 6, 1791-1828.
Pakes, A., J. Porter, K. Ho, and J. Ishii (2015). Moment inequalities and their application.
Econometrica, Volume 83, Issue 1, pages 315334.
Bajari, P., H. Hong, and S. Ryan (2010). Identification and estimation of discrete games of
complete information. Econometrica Volume 78, Issue 5, pages 15291568

Pakes, Ariel and Paul McGuire (1994). Computing Markov-perfect Nash Equilibria: Numer-
ical Implications of a Dynamic Differentiated Product Model, Rand Journal of Economics,
25, 555-589.
Ericson, R. and A. Pakes (1995), Markov Perfect Industry Dynamics: a Framework for
Empirical Work, Review of Economic Studies, 62, 53-82.

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Doraszelski, U. and M. Satterthwaite (2005): Foundations of Markov-Perfect Industry Dy-
namics: Existence, Purification, and Multiplicity, Working Paper.
Doraszelski, Ulrich and Pakes, Ariel (2006): A Framework for Applied Dynamic Analysis in
IO, in: Mark Armstrong and Robert Porter (eds.), Handbook of Industrial Organization,
Volume 3, North-Holland, Amsterdam.
Benkard, L., Weintraub, G. and B. Van Roy (2008), Markov Perfect Industry Dynamics with
Many Firms, Econometrica, Nov, 1375-1411.

Dynamic Discrete Games: Estimation

Ackerberg, D., L. Benkard, S. Berry, and A. Pakes (2006): Econometric Tools for Analyzing
Market Outcomes, in: Handbook of Econometrics, volume 6.
Victor Aguirregabiria and Pedro Mira, (2007) Sequential Estimation of Dynamic Discrete
Games, Econometrica 75 (1) , 1-54.
Bajari, P., L. Benkard, and J. Levin (2007): Estimating Dynamic Models of Imperfect
Competition, Econometrica, 1331-1370.
Aguirregabiria, V. and P. Mira (2010): Dynamic Discrete Choice Structural Models: A
Survey, Journal of Econometrics, forthcoming.
Pakes, A., M. Ostrovsky, and S. Berry (2007). Simple estimators for the parameters of
discrete dynamic games (with entry / exit examples). RAND Journal of Economics 38 (2),
373399.

Dynamic Discrete Games: Applications

Benkard, L. (2004): A Dynamic Analysis of the Market for Wide-Bodied Commercial Air-
craft Market, Review of Economics Studies, 71, 581-611.

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Goettler, R and Gordon, B. (2011), Does AMD spur Intel to innovate more? Journal of
Political Economy, 119(6), 1141-1200.
Ryan, S. (2012): The Costs of Environmental Regulation in a Concentrated Industry, Econo-
metrica, Volume 80, Issue 3, May 2012, p. 1019-1062.
Schmidt-Dengler, P. (2006): The Timing of New Technology Adoption: The Case of MRI,
Working Paper.
Sweeting, A. (2013). Dynamic product repositioning in differentiated product industries:
The case of format switching in the commercial radio industry. Econometrica Volume 81,
Issue 5, pp. 17631803
Collard-Wexler, A. (2013). Demand fluctuations and plant turnover in the ready-mix con-
crete industry. Econometrica, Vol. 81, No. 3, May, 2013, 10031037
*Reduced-form papers:
Ellison, Glenn, and Sara Fisher Ellison. (2011). "Strategic Entry Deterrence and the Behav-
ior of Pharmaceutical Incumbents Prior to Patent Expiration." American Economic Journal:
Microeconomics, 3(1): 1-36.
Dafny, L. (2005). Games hospitals play: Entry deterrence in hospital procedure markets.
Journal of Economics and Management Strategy 14, 513542.
Chevalier, J. (1995). Capital structure and product market competition: Empirical evidence
from the supermarket industry. American Economic Review 85, 415435.
Goolsbee, A. and C. Syverson (2008). How do incumbents respond to the threat of entry?
evidence from the major airlines. Quarterly Journal of Economics. Volume 123, Issue 4, pp.
1611-1633.

4.4 Price Discrimination

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Hendel, I., Nevo, A. 2013. Intertemporal Price Discrimination in Storable Goods Markets, Amer-

ican Economic Review, 103(7), 2722-2751.

Nair, H. 2007. Intertemporal Price Discrimination with Forward-looking Consumers: Application

to the US Market for Console Video-games, Quantitative Marketing and Economics, 5(3), 239-292.

Leslie, P. (2004). Price discrimination in broadway theater. Rand Journal of Economics 35


(3), 520541.
Mortimer, J. H. (2006). Price discrimination, copyright law, and technological innovation:
Evidence from the introduction of dvds. working paper, Harvard University.
Miravete, E. (2002). Estimating demand for local telephone service with asymmetric infor-
mation and optional calling plans. Review of Economic Studies 69, 943971.
Miravete, E. (2003). Choosing the wrong calling plan? ignorance, learning, and risk aversion.
American Economic Review 93, 297310.

Analytical models and reduced-form evidences

Stokey, N. L. 1979. Intertemporal Price Discrimination, The Quarterly Journal of Economics,

93(3), 355-371.

Aguirre, I., Cowan, S., Vickers, J. 2010. Monopoly Price Discrimination and Demand Curvature,

American Economic Review , 100(4), 1601-1615(15).

Borenstein, S. (1991). Selling costs and switching costs: Explaining retail gasoline margins.
The Rand Journal of Economics 22 (3), 354369.
Shepard, A. (1991). Price discrimination and retail configuration. Journal of Political Econ-
omy 99 (1), 3053.
Borenstein, S. and N. L. Rose (1994). Competition and price dispersion in the U.S. airline
industry. Journal of Political Economy 102 (4), 653683.
Goldberg, P. K. (1996). Dealer price discrimination in new car purchases: Evidence from
the consumer expenditure survey. Journal of Political Economy 104 (3), 622654.

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Chevalier, J., P. Rossi, and A. K. Kashyap (2003). Why dont prices rise during periods of
peak demand? evidence from scanner data. American Economic Review.
Busse, M. and M. Rysman (2005). Competition and price discrimination in yellow pages
advertising. Rand Journal of Economics 36, 378390.

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