Working Paper
"Demand Estimation With Foldable Menu: A Case Study of China's Tobacco Industry" (JMP)
Abstract
Information about product availabilities is necessary for the demand estimation of products with varying availabilities, but such data is not always observable. When firms endogenously choose product assortments to maximize expected profit, we can recover unobservable product availabilities from firms' profit maximization conditions. Searching for optimal assortment can be very time-consuming because the total number of assortments increases exponentially with the number of products. I show firms only need to choose from a foldable menu, wherein the number of assortments equals the number of products. I provide an empirical application of the foldable menu model on China's tobacco industry. My results show that ignoring varying product availabilities leads to underestimated price elasticity (0.38 vs. 1.2) and thus false tax policy implications. Making all cigarettes available has positive effects on consumer welfare (+6.75%) and cigarette sales (+12.11%) but negatively affects wholesale profits (-5.95%).
Previous Work
"The effects of the Non-Resident Speculation Tax on Toronto Housing Markets" (2nd Year Paper)