Interview with Ariel Pakes: The Inner Workings of Product Markets

Jeff Horwich serves as interlocutor in “Interview with Ariel Pakes: To understand the broader economy, unlock the inner workings of product markets” (Federal Reserve Bank of Minneapolis, September 25, 2026). Pakes is an industrial organization economist, so he is congenitally suspicious of macroeconomics aggregates and broad statements about “how markets work.” Instead, he wants to examine actual markets. One of his most prominent papers, written with Steven Berry and James Levinsohn, was called “Automobile Prices in Market Equilibrium,” and published in Econometrica in 1995 (63(4), 841–890). The problem the authors faced was that if you want to think about how demand for one kind of car will be affected by a change in price, you also need to think about how demand for all other cars will be affected: for example, are there lots of close substitutes for the car where the price is rising, or not very many? But with 200 models of cars, this problem quickly becomes unwieldy. Here’s…

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