Department of Economics
2001 Sheridan Road
Evanston, IL 60208-2600
Institutional Affiliation: Northwestern University
NBER Working Papers and Publications
|June 2020||Parallel Inverse Aggregate Demand Curves in Discrete Choice Models|
with , , : w27437
This paper highlights a previously-unnoticed property of commonly-used discrete choice models, which is that they feature parallel demand curves. Specifically, we show that in random utility models, inverse aggregate demand curves shift in parallel with respect to variety if and only if the random utility shocks follow the Gumbel distribution. Using results from Extreme Value Theory, we provide conditions for other distributions to generate parallel demands asymptotically, as the number of varieties increase. We establish these results in the benchmark case of symmetric products, illustrate them using numerical simulations and show that they hold in extended versions of the model with correlated tastes and asymmetric products. Lastly, we provide a “proof of concept” of parallel demands as ...