Home bias, structural demands and the European car market

Abstract

Home bias in consumption is the widespread phenomenon of consumers choosing a bundle of tradable goods with a large domestic component. The home bias can be explained by various reasons, with biased preferences as a natural common feature to all of them. The empirical relevance of this preference based explanation of home bias is explored for the European car market using the framework of Berry, Levinsohn, and Pakes (1995). In contrast to the previous nested logit literature, BLP imposes less structure on the demand elasticities differences between domestic and foreign producers whilst controlling for price endogeneity, unobserved characteristics and consumer heterogeneity. I find that including home bias in preferences explains a remarkable large fraction of the actual home bias and it is well captured by a large fixed effect or "utility shifter". Contrary to the assumptions of the previous nested logit estimations, domestic producers do not face less elastic demands in their domestic markets than foreign competitors. This result justifes mirror-symmetric preferences biased towards the home good as long as the own price elasticities remain in the same range between domestic and foreign goods