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Discussion Paper

Foundations of Demand Estimation

Why Study Demand?

Little can be said about the functioning of a market without a quantitative assessment of demand. In the modern Industrial Organization (“IO”) literature, for example, estima- tion of demand elasticities is essential for measuring markups and quantifying sources of market power. And almost any counterfactual question about a market requires quanti- tative measures of how choices respond to ceteris paribus changes in the prices or other characteristics of the available options. Such measures seldom suffice on their own to provide full answers to the economic questions of interest concerning market outcomes, but they are often necessary. Examples include assessments of

  • the impact of a tax or subsidy;

  • the social value of a new good;

  • the effect of a tariff on prices;

  • the effect of a merger on consumer prices;

  • outcomes under alternative school choice regimes;

  • the impact of adverse selection on insurance markets; and

  • any quantitative question (and many qualitative questions) concerning consumer welfare.

    Of course, the importance of measuring demand is not limited to the realm of IO. As these examples suggest, demand is central to substantive policy questions in public economics, trade, health, education, and other fields.