A0347
Title: Identifying marginal costs from discrete prices and product characteristics
Authors: Mathieu Marcoux - Universite de Montreal (Canada) [presenting]
Colin Jaures Ndonfack Zango - Universite de Montreal (Canada)
Abstract: A new approach is proposed to identify the marginal costs of differentiated products when prices and other observed product characteristics are discrete. It boils down to a discrete choice problem allowing for flexible distributions of unobservables, therefore avoiding strong distributional assumptions on unobserved demand shocks. The approach treats the conditional expectation of demand as a nuisance function. If data about market shares or sales are available, one can estimate this nuisance function prior to recovering marginal costs. If demand data are not available, a natural exclusion restriction is leveraged between costs and demand, and the nuisance function is approximated using differences of observed product characteristics. The identification procedure features appealing computational properties despite the large number of parameters. Simulation evidence suggests that the ability to precisely recover marginal costs depends on the quality of the approximation of the demand's conditional expectation.
