This paper interprets and develops Berry et al.  model in the Bayesian framework. First, we partition the consumer utility into two components: mean and heteroskedasticity. Our decomposition simplifies the interpretation of preference heterogeneity by linking it to the heteroskedasticity. Second, we model the mean utility nonparametrically by using a Dirichlet mixture model (DPM) while preserving the same consumer heterogeneity structure. This method identifies the importance of nonlinearity in the mean utility function. Third, we propose a new DPM framework to take account of discrete variables such as brand dummy variables. Fourth, we present a novel approach to utilize instrumental variables nonparametically in the presence of price endogeneity. Lastly, we apply the new model to Australian apple market to show its advantages.
The University of Melbourne
Fri, 21/04/2017 - 4:00pm
BUS 115, School of Economics. UNSW