Differentiated Products with Endogenous Choice Sets

This paper extends the equilibrium model of Berry, Levinsohn and Pakes (BLP, 1995) by endogeneizing the consumers’ choice sets. We introduce an entry stage preceding the Bertrand pricing game where firms choose which products to offer. We show that the demand and cost parameters are identified under selectively offered products. We then propose a semiparametric modification of the BLP estimator that accounts for the endogeneity of the choice set. A Monte Carlo study shows the inconsistency of the usual estimators and the good performance of our estimator in finite samples.

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