NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Andrey Simonov

Columbia Business School
90 Morningside Dr Apt 6C
New York, NY 10027

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Institutional Affiliation: Columbia Business School

NBER Working Papers and Publications

September 2019State-Dependent Demand Estimation with Initial Conditions Correction
with Jean-Pierre H. Dubé, Günter J. Hitsch, Peter E. Rossi: w26217
We analyze the initial conditions bias in the estimation of brand choice models with structural state dependence. Using a combination of Monte Carlo simulations and empirical case studies of shopping panels, we show that popular, simple solutions that mis-specify the initial conditions are likely to lead to bias even in relatively long panel datasets. The magnitude of the bias in the state dependence parameter can be as large as a factor of 2 to 2.5. We propose a solution to the initial conditions problem that samples the initial states as auxiliary variables in an MCMC procedure. The approach assumes that the joint distribution of prices and consumer choices, and hence the distribution of initial states, is in equilibrium. This assumption is plausible for the mature consumer packaged good...
 
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