Structural estimation on demand with brand choice and quantity adjustment: From non-organic to organic food

I estimate product demand in the vertically differentiated goods market, where consumers choose brand and quantity. I develop a two-stage decision model where consumer chooses both discrete brand and continuous quantity. Using Nielsen Homescan data, I estimate consumer demand in the markets of organic and non-organic bagged carrots.;I modify Dixit-Stiglitz preferences by adding linear combination of brands and preference weights of each brand in order to capture quality-quantity trade-off. In my model, the quantity decision is brand dependent and it is derived from underlying optimization. As Hanemann (1984) points out, optimal discrete choice depends on optimal continuous choice and vice versa. While Hanemann (1984) does not focus on quality-quantity trade-off, my model sheds light on vertically differentiated goods market. I estimate individual demand using maximum likelihood method and conduct counterfactual experiments of price and income changes.;The policy experiments are conducted for two scenarios with plausible values of price elasticity of demand. For a 10% drop in prices of organic carrots, for instance, producers of organic carrots can expect 42.9% rise in quantity demanded and 7.8% increase in supplier revenue in organic carrots market. As consumers switch from non-organic to organic carrots in response to price fall for the latter, they could make a downward adjustment in overall quantity demanded of carrots; the total consumption in the carrot markets (organic and non-organic) would fall by 1.8%, with the fall in the supplier revenue by 2.5%.;Consumption of carrots depends also on income elasticity of demand. With a 10% increase in household income, our experiments show, consumption of organic carrots would increase 19.7% while that of non-organic carrots would fall 3.1%. With increase in income, the quantity demanded overall in the carrot markets would fall by 1.7% and the supplier revenue by 2.8%. Given our data and the underlying pattern of carrot consumption, a downward quantity adjustment in total carrot consumption (organic and non-organic) could well be expected. That segment of the consumers who switch from non-organic to organic carrots will see their carrot consumption fall (given their budget constraints). If these consumers play a more potent role in the carrot market (i.e., they dominate the carrot demand in the market), their role in reducing total carrot consumption may outweigh that of organic consumers who now increase the consumption of the same (organic carrots).