Calibrating Generalized Nested Logit Demand

Abstract The commonly used nested logit (NL) demand system allows for some flexibility in substitution patterns, but each good in the market must be assigned to exactly one nest. The generalized nested logit (GNL) is a more flexible demand system that allows for overlapping nests and reflects a richness in substitution patterns that can be important for many contexts. This paper considers what information is required to calibrate the parameters of a GNL demand system with products belonging to two nests, and shows through empirical examples how the parameters can be calibrated using data that is typically available to competition regulators during an investigation.