Price Competition Under Mixed Multinomial Logit Demand: Sufficiency Conditions for Validating the Model
Chung-seung Lee, Metin Çakanyildirim
Production and Operations Management · 2021 · Volume 30 · Issue 9
Abstract
This study is motivated by a fundamental question among researchers: do price data correspond to a pure strategy Nash equilibrium of an estimated econometric model of Bertrand competition? The affirmative answer to this question is essential for validating the estimated model. Despite the extensive empirical applications of Bertrand competition over the last three decades, answering the question remains a daunting task for the researchers. This study takes a step to fill this gap, identifying a set of easy-to-verify and easy-to-interpret conditions under which, by checking how closely the price data fit the system of first-order conditions, one can easily obtain an answer to the question.
Keywords
differentiated product market, model validation, mixed multinomial logit model, competitive pricing
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