Demand Models for Differentiated Products with Complementarity and Substitutability

Abstract

We develop a class of demand models for differentiated products based on the concept of entropy. The new models facilitate the BLP method (Berry et al., 1995) by avoiding numerical inversion of the demand system. They accommodate rich patterns of substitution and complementarity while being easily estimated with standard regression techniques and allowing very large choice sets. We use the new models to describe markets for differentiated products that exhibit segmentation along several dimensions and illustrate their application by estimating the demand for cereals in Chicago.