To Answer The Questions In This Part Of The Problem Set You Need To Us
To answer the questions in this part of the problem set you need to use the dataset verboven_cars.csv. Use this dataset to implement the estimations described below. Please, provide the STATA code that you use to obtain the results. For all the models that you estimate below, impose the following conditions:
Use prices measured in euros (eurpr).
For the product characteristics in the demand system, include the characteristics: horsepower (hp), fuel (li), width (wi), height (he), weight (we), and domestic (home).
For market size (number of consumers), use Population/4, i.e., pop/4.
You need to construct the market share of each car model in each country and year: sjmt = qjmt/Hmt, where qjmt is the total units sold of car model j in country m and year t (qu in the data), and Hmt is the total potential consumers (market size).
Include fixed effects for country (ma), year (ye), and brand (brd).
Include as explanatory variables the market characteristics: log of population (ln(pop)) and log of GDP (log(gdp)).
Paper For Above instruction
The analysis of demand in automobile markets often involves complex econometric models, especially when accounting for product heterogeneity, market structure, and unobserved factors. In this context, the use of logit models with fixed effects is a common approach to capturing consumer choice behavior and market dynamics. This paper implements a series of estimations using the dataset verboven_cars.csv to analyze the demand system for cars, focusing on the effects of product characteristics, market size, and price variations. Additionally, the work explores the use of instrumental variables to address endogeneity concerns, providing insights into consumer willingness to pay for specific vehicle features and the overall price elasticity of demand.
The initial step involves estimating a standard logit model with fixed effects for country, year, and brand. The model considers prices in euros, along with product-specific features such as horsepower, fuel type, dimensions, weight, and whether the car is domestic. The fixed effects control for unobserved heterogeneity across different markets and brands, ensuring that the estimated parameters reflect true
consumer preferences rather than market-specific idiosyncrasies. The interpretation of results primarily focuses on the estimated coefficients on product characteristics, prices, and market variables, providing insights into demand sensitivities.
Next, the analysis extends to heterogenous price coefficients across countries, allowing the marginal willingness to pay to differ by geographic market. This variation captures regional differences in preferences and market conditions that may influence the valuation of car features. A hypothesis test assesses whether these price coefficients are statistically equivalent across countries, informing whether a uniform pricing strategy may be appropriate or if market-specific adjustments are necessary.
The third stage employs an instrumental variables approach to address potential endogeneity of prices, which may be correlated with unobserved factors affecting demand. The instruments are constructed from the product characteristics themselves, following the logic of the IV approach to isolate exogenous variation in prices. This allows for consistent estimation of the demand model parameters, leading to more reliable inferences about consumer preferences and valuation of vehicle features.
Using the IV results, the paper calculates the consumer's willingness to pay for a one-unit reduction in fuel consumption, reflecting improvements in fuel efficiency. This is achieved by examining the estimated coefficient on the fuel characteristic and translating it into monetary terms based on the marginal utility derived from these improvements. Additionally, the demand elasticity at mean market conditions is computed, providing a measure of how responsive consumer demand is to changes in vehicle prices, which is crucial for pricing and market entry strategies.
References
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