To compute own-price and cross-price elasticities,
we estimate OLS regressions which control for unobserved heterogeneity across products and across categories (we use the fixed effects transformation). Based
on these estimates, we subsequently compute the ownand cross-price elasticities by weighting them with
the appropriate Pareto mapping parameter β, which
was estimated earlier. In other words, estimating the
equations using log ranks, rather than actual quanti-
ties, yields the correct elasticities, but they are scaled
up by the Pareto mapping parameter. This is similar to the approach used in prior literature (Chevalier
and Goolsbee, 2003; Ghose, Smith and Telang, 2006).
These regressions have the general form