Business, Management and Accounting
4 years ago

Poor quality instruments in demand models lead to inaccurate marketing strategies.

RePEc: Research Papers in Economics
Properties of Instrumental Variables Estimation in Logit-Based Demand Models: Finite Sample Results
Rick L. Andrews, Peter Ebbes

Paper Summary

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Endogeneity issues in demand models can skew results, affecting pricing and demand for products. Using poor quality instruments in logit-based demand models can lead to inaccurate price elasticity estimates. The control function approach with readily-available instruments significantly reduces errors in elasticity estimates. More brands exacerbate endogeneity issues, especially with poor instruments. The number of stores is crucial for likelihood ratio testing. These findings apply to various market conditions and demand specifications.