Structural models of complementary choices
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Structural models of complementary choices Steve Berry & Ahmed Khwaja & Vineet Kumar & Andres Musalem & Kenneth C. Wilbur & Greg Allenby & Bharat Anand & Pradeep Chintagunta & W. Michael Hanemann & Przemek Jeziorski & Angelo Mele
Published online: 1 July 2014 # Springer Science+Business Media New York 2014
Abstract This article reviews the rapidly growing literature on structural models of complementary choices. It discusses recent modeling developments and identifies promising areas for future research. Keywords Structural models . Complementary choices . Applied econometrics . Empirical industrial organization . Quantitative marketing S. Berry : A. Khwaja Yale University, New Haven, CT 06520, USA S. Berry e-mail: [email protected] A. Khwaja e-mail: [email protected] V. Kumar : B. Anand Harvard Business School, Boston, MA 02163, USA V. Kumar e-mail: [email protected] B. Anand e-mail: [email protected] A. Musalem Universidad de Chile, Beauchef 850, Santiago, Región Metropolitana, Chile e-mail: [email protected] K. C. Wilbur (*) University of California, San Diego, CA 92093, USA e-mail: [email protected] G. Allenby Ohio State University, Columbus, OH 43210, USA e-mail: [email protected] P. Chintagunta University of Chicago, 5801 S Ellis Ave, Chicago, IL 60637, USA e-mail: [email protected]
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Mark Lett (2014) 25:245–256
1 Introduction Complementary choices are important and pervasive yet occasionally elusive. Single consumers make complementary choices in purchase decisions (e.g., chips and salsa), product interoperabilities (smartphones and networks), and dynamic decisions (current exercise and future health-care consumption). Multiple consumers make complementary choices when they interact in strategic games or form networks. Firms make complementary choices when determining production inputs, entering related markets, and strategic mergers. The structural empirical literature has recently started to address the difficult problem of how to model complementary choices. This new work contrasts with traditional approaches such as discrete choice models, wherein all choices are mutually exclusive. A naïve approach to modeling complementary choices is to include all possible bundles of choices in the choice set. However, for any given set of options, the set of all possible subsets is exponentially larger and often too large to feasibly estimate. Second, specific models of complementarities are needed to ensure desirable equilibrium properties in games among agents (e.g., existence, uniqueness, or multiplicity). Third, models of complementarities are often required to evaluate counterfactuals, such as predicting demand for bundles of complementary products that have not previously been offered. We review the literature selectively, summarizing the state of the art and identifying promising directions for future work. We begin with complementary choices made by consumers, and then examine complementary choices made by firms.
2 Demand complementarities Complementary goods ar
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