Publications
Publications
- 2024
- HBS Working Paper Series
Estimating Models of Supply and Demand: Instruments and Covariance Restrictions
By: Alexander MacKay and Nathan H. Miller
Abstract
We consider the identification of empirical models of supply and demand with imperfect
competition. We show that a restriction on the covariance between unobserved demand and
cost shocks can resolve endogeneity and identify the price parameter. We demonstrate how
to employ this approach in estimation, and we compare it to the method of instrumental
variables. Our formal results also indicate that weaker covariance restrictions can bound
the price parameter. We illustrate the covariance restriction approach with applications to
ready-to-eat cereal, cement, and airlines.
Keywords
Demand Estimation; Identification; Endogeneity Bias; Covariance Restrictions; Ordinary Least Squares; Instrumental Variables; Price; Demand and Consumers; Competition
Citation
MacKay, Alexander, and Nathan H. Miller. "Estimating Models of Supply and Demand: Instruments and Covariance Restrictions." Harvard Business School Working Paper, No. 19-051, October 2018. (Revised January 2024. Direct download.)