Beyond Plain Vanilla: Modeling Joint Product Assortment and Pricing Decisions
Stanford Graduate School of Business
Michael J. Mazzeo
Northwestern University - Kellogg School of Management
University of Pennsylvania - Business & Public Policy Department
Stanford University Graduate School of Business Research Paper No. 1982R
In this paper, we take a first step toward exploring empirically the product assortment strategies of oligopolistic firms. Our starting point is a discrete-choice demand model for differentiated products. We incorporate the demand model into an equilibrium supply model, in which firms compete by first choosing which products to offer and then by setting prices. We show how modeling joint product assortment and pricing decisions enriches standard product choice models by allowing insights into how demand characteristics affect firms' product offerings in a competitive environment. We furthermore demonstrate that incorporating endogenous product choice into demand models is essential for policy simulations (e.g., mergers) as it entails at times dramatically different welfare assessments than the common assumption that product assortments are exogenous.
Number of Pages in PDF File: 54
Keywords: Product Management, discrete games, multiproduct firms, product assortment decisions
JEL Classification: L0, L1, L2, L8, M3working papers series
Date posted: December 20, 2007
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