Portfolio considerations in differentiated product purchases: An application to the Japanese automobile market

Consumers often purchase more than one differentiated product, assembling a portfolio, which might potentially affect substitution patterns of demand and, as a consequence, oligopolistic firms' pricing strategies. To study such consumers' portfolio considerations, this paper develops and estimates a structural model that allows for flexible complementarities/substitutabilities, using Japanese household-level data on automobile purchases. My estimates suggest that complementarities arise when households purchase a combination of one small automobile and one minivan as their portfolio. Simulation results suggest that, due to such portfolio considerations, a policy proposal of repealing the current tax subsidies for small eco-friendly automobiles would not necessarily sharply decrease the demand.