A Bayesian Semi-parametric Approach for Random Coefficients Demand Framework


Yong Song


The University of Melbourne


Fri, 21/04/2017 - 4:00pm


BUS 115, School of Economics. UNSW


This paper interprets and develops Berry et al. [1995] model in the Bayesian
framework. First, we partition the consumer utility into two components: mean
and heteroskedasticity. Our decomposition simplifies the interpretation of prefer-
ence 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.