Publications
Publications
- February 2025
- American Economic Journal: Microeconomics
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." American Economic Journal: Microeconomics 71, no. 1 (February 2025): 238–281. (Direct download.)