Foundations of Demand Estimation

Abstract

Demand elasticities and other features of demand are critical determinants of the answers to most positive and normative questions about market power or the functioning of markets in practice. As a result, reliable demand estimation is an essential input to many types of research in Industrial Organization and other fields of economics. This chapter presents a discussion of some foundational issues in demand estimation. We focus on the distinctive challenges of demand estimation and strategies one can use to overcome them. We cover core models, alternative data settings, common estimation approaches, the role and choice of instruments, and nonparametric identification. ∗For the Handbook of Industrial Organization. We benefited from detailed comments from Chris Conlon, Jean-Pierre Dubé, Aviv Nevo, and Frank Verboven. Jaewon Lee provided capable research assistance.