Quantitative Economics: Nov, 2021, Volume 12, Issue 4

Blurred boundaries: A flexible approach for segmentation applied to the car market

Laura Grigolon

Prominent features of differentiated product markets are segmentation and product proliferation blurring the boundaries between segments. I develop a tractable demand model, the Ordered Nested Logit, which allows for asymmetric substitution between segments. I apply the model to the automobile market where segments are ordered from small to luxury. I find that consumers, when substituting outside their vehicle segment, are more likely to switch to a neighboring segment. Accounting for such asymmetric substitution matters when evaluating the impact of new product introduction or the effect of subsidies on fuel‐efficient cars.

Discrete choice model Generalized Extreme Value Ordered Nested Logit D11 D12 L62 M3

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