Blurred boundaries: a flexible approach for segmentation applied to the car market Laura Grigolon May 2, 2021 Abstract Prominent features of differentiated product markets are segmentation and product proliferation blurring the boundaries between segments. I develop a tractable demand model, the Ordered Nested Logit, which allows for asymmetric substitution between segments. I apply the model to the automobile market where segments are ordered from small to luxury. I find that consumers, when substituting outside their vehicle segment, are more likely to switch to a neighboring segment. Accounting for such asymmetric substitution matters when evaluating the impact of new product introduction or the effect of subsidies on fuel-effi cient cars. JEL No. D11, D12, L62, M3 Laura Grigolon: University of Mannheim, Department of Economics and MaCCI, L3, 5-7 Mannheim, Germany. (Email:
[email protected]). I am particularly grateful to Frank Verboven for his helpful comments and to Penny Goldberg for her support. I also thank Victor Aguirregabiria, Geert Dhaene, Tobias Klein, Laura Lasio, Chang Liu, Jean-Marc Robin, Nicolas Schutz, Pasquale Schiraldi, Michelle So- vinsky, Johannes Van Biesebroeck, Patrick Van Cayseele, Mike Veall, and participants at various seminars and conferences. I gratefully acknowledge financial support from SSHRC (Insight Development Grant) and the German Research Foundation (DFG) through CRC TR 224. 1 Introduction In most differentiated product markets, products can be partitioned into segments according to shared common features. Segmentation is not only a descriptive process, but also a practice used by firms to develop targeted marketing strategies and decide the placement of their products. Often, segments can be ordered in a natural way.