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Calibrating the AIDS and Multinomial Logit Models with Observed Product Margins

By  |  December 18, 2012

Posted by D. Daniel Sokol

Gloria Sheu (Economic Analysis Group, Antitrust Division, U.S. Department of Justice) and Charles Taragin (Economic Analysis Group, Antitrust Division, U.S. Department of Justice) are Calibrating the AIDS and Multinomial Logit Models with Observed Product Margins

ABSTRACT: We show how observed product margins may be used in lieu of an observed market elasticity to calibrate parameters for two commonly used demand forms: the Almost Ideal Demand System (AIDS) and the multinomial logit. This technique is useful for antitrust practitioners interested in simulating the e ects of a merger, since estimates of product margins are often easier to obtain than estimates of market elasticities.