Vice President Kristof Zetenyi and Manager Thomas Beckford Examine Logit Demand Model in Competition Policy International Article
September 18, 2024
The logit model has come under scrutiny due to an order issued in August 2023 by US District Judge James Donato in In re: Google Play Store Antitrust Litigation. The order excluded the plaintiffs’ merits expert’s analysis due to its reliance on a pass-through formula derived from the logit model. Judge Donato found that the characteristics of the logit model, including its underlying independence from irrelevant alternatives (IIA) property, were not sufficiently reliable to be admitted under Rule 702. The ruling raises a number of questions: What is the IIA property? What is the impact of the IIA property on demand models? What should experts consider when using a logit model?
Vice President Kristof Zetenyi and Manager Thomas Beckford explore these questions in their article “Logit or Leave It?” They begin with background on the logit model’s history and the impact of the IIA property on the analysis of consumer choices. The logit demand model was a breakthrough in economics when it was first developed during an era with significantly less computational power than today. The assumptions of the logit demand model ease the burden of estimating consumer demand; however, these assumptions also introduce the IIA property and can lead to economically unrealistic predictions of substitution patterns in consumer demand.
The authors then examine the importance of the IIA property to Judge Donato’s Google Play Store order and a commonly used auction model. Considering the future of the logit demand models in modern expert analysis, they caution economic experts to perform a careful assessment of the appropriateness of relying on any models that exhibit the IIA property, and offer a number of ways to evaluate the logit model.
The article appeared in Competition Policy International.