Endogenous Product Choice: A Progress Report

Empirical models of differentiated product demand are widely used by both academics and practitioners. While these methods treat carefully the potential endogeneity of price, until recently they have assumed the number and characteristics of the products offered by firms are exogenous. This paper presents a progress report on an ongoing research agenda to address this issue. First, it summarizes how the appropriate choice of “orthogonal” instruments can yield consistent estimates of own and cross-price elasticities in the presence of endogenous product characteristics. Second, it summarizes how to measure “quality markups” and the welfare consequences of endogenous product quality in U.S. cable television markets. Related papers and extensions to consider multiple product characteristics and dynamics are also discussed. I would like to thank Sean Chu, Alon Eizenberg, Ying Fan, and Luke Froeb for their comments on this paper, Dan Ackerberg, Jin Hahn, Oleksandr Shcherbakov, and Matthew Shum for their many conversations about the topics surveyed here, and Nicola Pavanini and Alessandro Iaria for their research assistance. Any errors are my own. Thanks also to ESRC Grant RES-062-23-2586 for financial support for this research. Correspondence may be sent to Gregory S. Crawford, Department of Economics, University of Warwick, Coventry, CV4 7AL, United Kingdom, phone +44 2476 523470, email [email protected].