Modeling Indivisible Demand

Abstract:     
Disaggregate demand in the marketplace exists on a grid determined by the package sizes offered by manufacturers and retailers. While consumers may want to purchase a continuous-valued amount of a product, realized purchases are constrained by available packages. This constraint might not be problematic for high-volume demand, but it is potentially troubling when demand is small. Despite the prevalence of packaging constraints on choice, economic models of choice have been slow to deal with their effects on parameter estimates and policy implications. In this paper we propose a general framework for dealing with indivisible demand in economic models of choice, and show how to estimate model parameters using Bayesian methods. Analyses of simulated data and a scanner-panel dataset of yogurt purchases indicate that ignoring packaging constraints can severely bias parameter estimates and measures of model fit, which results in the inaccurate measures of metrics such as price elasticity and compensating value. We also show that 9.52% of non-purchase in the data reflects the restriction of indivisibility, not the lack of preference.

Number of Pages in PDF File: 39

Keywords: Direct Utility Models, Inequality Estimation, Bayesian Error

JEL Classification: C11, C24, C81, M31

working papers series