Demand estimation, empirical io in stata

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 describe 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), li (fuel), width (wi), height (he), weight (we), and home (domestic).

• 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 and the market share of outside good s0mt = (Hmt −

P

j 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 county (ma), year (ye), and brand (brd). Include also as

explanatory variables the market characteristics: ln(pop) and log(gdp).

Questions:

• (a). Obtain the OLS-Fixed effects (country, year, brand) estimator of the Standard

logit model. Interpret the results.

• (b). Obtain the OLS-Fixed effects (country, year, brand) estimator of the Standard

logit model by allowing heterogenous price coefficents across countries. Test whether

the price coefficients are the same across countries. Interpret the results.Obtain the Instrumental Variables (IV) estimator of the Standard logit model. Use

the following set of instruments. For each product attribute X1j =horsepower, X2j =

fuel, X3j = width, X4j = height, X5j = weight, and X6j =domestic, construct the

following three instruments. For the kth dimension of product attributes, k = 1, …, 6,

construct

IVkjmt = Xkjmt −

1

Jmt − 1

(

X

i̸=j

Xkimt)

Interpret the results from this IV estimation.

• 2 points bonus question (d). Using the IV estimation results, obtain how much the average

consumer is willing to pay (in Euros) for a reduction of 1 unit in the characteristic

fuel (that is, for an improvement in fuel efficiency of 1 liter per km).

• 2 points bonus question (e). Based on the IV estimation results, obtain the average

price elasticity of demand evaluated at the mean values of prices and market shares.