Shape Restrictions for Structural Demand Estimation

Abstract

This paper provides shape restrictions for the structural estimation of demand functions derived from a surplus-based model describing the behavior of a population of consumers. I first derive the restrictions that this model imposes on the implied demand function and its inverse. Then, I show that each demand function is consistent with utility maximization by heterogeneous consumers. Overall, these results generate novel demand functions, which accommodate rich substitution patterns and can be estimated by possibly linear instrumental variables regression to answer a wide range of economic questions, including market power, mergers, and regulatory changes in taxes and trade policy.