- Current approaches for estimating discrete choice models of consumer demand are computationally challenging, making them difficult to use for policy analysis.
- This paper presents a simple method for estimating these models by using increasingly common microdata, such as household demographics.
- The method is applied to simulate the effect of tightening fuel economy standards for cars and light trucks on new vehicle sales.
- The simulation results suggest that a 1-percent increase in the stringency of the standards leads to a modest reduction in new vehicle sales.
Modeling preference heterogeneity in discrete choice models of product differentiation remains computationally challenging. I derive a new method for estimating preference heterogeneity in these models. A key advantage of the method is its simplicity: preference heterogeneity parameters are estimated with a closed-form expression or with a linear regression. I apply the method to estimate parameters of new vehicle demand and to simulate the effects of new vehicle fuel economy standards. The simulation results suggest that a marginal tightening of the standards has a modest impact on total new vehicle sales.