American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Estimating Models of Supply and Demand: Instruments and Covariance Restrictions
American Economic Journal: Microeconomics
vol. 17,
no. 1, February 2025
(pp. 238–81)
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.Citation
MacKay, Alexander, and Nathan H. Miller. 2025. "Estimating Models of Supply and Demand: Instruments and Covariance Restrictions." American Economic Journal: Microeconomics, 17 (1): 238–81. DOI: 10.1257/mic.20230024Additional Materials
JEL Classification
- C51 Model Construction and Estimation
- D12 Consumer Economics: Empirical Analysis
- L13 Oligopoly and Other Imperfect Markets
- L61 Metals and Metal Products; Cement; Glass; Ceramics
- L66 Food; Beverages; Cosmetics; Tobacco; Wine and Spirits
- L93 Air Transportation
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