Nested Logit or Random Coefficients Logit? A Comparison of Alternative Discrete Choice Models of Product Differentiation | Zendy

Laura Verboven Grigolon | Zendy; Frank Verboven | Zendy

Open Access

Nested Logit or Random Coefficients Logit? A Comparison of Alternative Discrete Choice Models of Product Differentiation

Author(s) -

Laura Verboven Grigolon,

Frank Verboven

Publication year - 2013

Publication title -

the review of economics and statistics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 8.999

H-Index - 165

eISSN - 1530-9142

pISSN - 0034-6535

DOI - 10.1162/rest_a_00420

Subject(s) - mixed logit , nested logit , econometrics , logit , discrete choice , logistic regression , market segmentation , mathematics , product (mathematics) , economics , product differentiation , statistics , mathematical economics , microeconomics , geometry , cournot competition

We propose a random coefficients nested logit (RCNL) model to compare the tractable nested logit (NL) model with the more complex random coefficients logit (RC) model. After a simulation study, we use data on the European automobile market. Both the NL and RC models are rejected against the RCNL model. The RC model results in different substitution patterns and a wider market definition than the NL and RCNL models. Nevertheless, the predicted price effects from mergers are robust across models. Our findings stress the importance of accounting for discrete sources of market segmentation not captured by continuous product characteristics.

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