Estimation of Store Choice Model with Endogenous Shopping Bundles

This paper examines the effects of measurement errors in household shopping plans and price beliefs on the estimates of price elasticities in retail outlet choice. Previous studies parsimoniously use realized purchases as a proxy for unobserved shopping lists and assume homogenous price expectation across all households and over the entire sample period. This measurement error in forecasting expected basket costs introduces attenuation bias in storelevel price elasticities toward zero. I show that the bias is reduced with my improved measures of expected basket costs by estimating shopping lists of households and by constructing household-, time-, store-, and goods-specific price expectations. ∗This paper is based on various chapters of my doctoral dissertation. I am grateful to my advisor, Amil Petrin, for his continuous advice and support at the University of Minnesota. I would like to thank Pat Bajari, Tom Holmes, Kyoo-il Kim, Om Narasimhan, Elena Pastorino, Maria Ana Vitorino, and Joel Waldfogel for their many useful comments and suggestions. I am also indebted to the seminar participants at the University of Minnesota, the Pennsylvania State University, the University of Arkansas, Sungkyunkwan University, and Yonsei University, as well as conference participants at the 2014 IIOC. All remaining errors are mine. Correspondence: Hyunchul Kim, Department of Economics, Sungkyunkwan University, 25-2, Sungkyunkwan-ro, Jongno-gu, Seoul, 110-745, Korea, Tel: +82 2 760 0147, E-mail: [email protected]