The Use of the Logit Model in Applied Industrial Organization

Qualitative choice models, such as the logit model, can capture important firm and product asymmetries. This paper surveys use of the logit model in industrial organization, with special focus on its application to merger analysis. The basic model and its motivation are reviewed, as is its estimation. Discussed in some detail is the use of the logit model to predict the price and welfare effects of horizontal mergers in differentiated products industries. Simulation using a qualitative choice model is argued to be far superior to traditional structural analysis. Logit merger simulations have the particular virtues of low informational and computational burdens and the use of the logit model can be motivated as reflecting a diffuse prior on the structure of demand.