Working papers

• A Pure Characteristics Approach for Evaluating Welfare Effects from Introducing New Products with Options (Job Market Paper)

Abstract: Structural estimation of welfare effects from new goods largely relies on demand models that include a logit error and the simulation of a counterfactual that removes the new goods. In markets where consumers have both brand preferences and product-type (option) preferences, nested demand models come into play. However, the logit errors in nested logit models not only lead to an inaccurate prediction of shares in the counterfactual but also make welfare estimates sensitive to the number of nests. To deal with these two problems which give rise to implausibly large welfare estimates, I develop an empirical framework to estimate a pure characteristics demand model that allows for option (nest) choices and eliminates the need to rely on logit errors. I then provide an application using scanner data to quantify the welfare effects of four new products simultaneously introduced to the U.S. shampoo market where consumers have strong preferences over options. Results show that consumer welfare increases the most from the shampoo product that offers a niche option. Compared with models featuring logit errors, my approach reduces welfare overestimation by at least 73%. It also provides a better fit and more accurate welfare estimates than the pure characteristics model ignoring options.

Presented at: IIOC 2023 (Rising Stars Session), CEA 2023

• Why Do Some New Products Fail? Evidence from the Entry and Exit of Vanilla Coke (with Robert Clark)

Abstract: The analysis of new product introduction using discrete-choice demand models has focused on successful products (e.g. the minivan) and their welfare impacts. Instead, we apply this approach to unsuccessful products to provide insight into the reasons for their failure. Our case study is the introduction and subsequent exit of Coca-Cola's Vanilla Coke. Using IRI scanner data we estimate demand and supply and simulate a counterfactual scenario in which Vanilla Coke was not introduced. We then estimate Coca-Cola's profit gains from the new brand and find they would not cover fixed costs. We analyze the importance of (i) overall demand for soft drinks, (ii) private label presence, (iii) rival promotion, and (iv) consumers' perceptions of Vanilla Coke's quality, for explaining its failure, by investigating the levels of each required for Vanilla Coke to at least cover its fixed costs.  We then investigate the extent to which Coca-Cola could have incorrectly forecast the levels of these variables by looking at their pre-introduction values. We find Coca-Cola did anticipate some rival reaction that made survival harder, but the actual changes were even beyond its forecasts and contributed to Vanilla Coke's exit.

Presented at: CEA 2022 (presenter)