Abstract

http://ssrn.com/abstract=875125
 
 

References (14)



 
 

Citations (7)



 


 



Category Pricing with State Dependent Utility


Jean-Pierre H. Dube


University of Chicago - Booth School of Business

Guenter J. Hitsch


University of Chicago - Booth School of Business

Peter E. Rossi


University of California, Los Angeles (UCLA) - Anderson School of Management

Maria Ana Vitorino


University of Minnesota - Carlson School of Management

December 2006


Abstract:     
There is a substantial literature that documents the presence of state dependent utility with packaged goods data. Typically, a form of brand loyalty is detected whereby there is a higher probability of purchasing the same brand as has been purchased in the recent past. The economic significance of the measured loyalty remains an open question. We consider the category pricing problem in the presence of loyalty and demonstrate that a retailer has an incentive to invest in building brand loyalty to maximize the present value of category profits and that this materially affects optimal pricing. Given the well-known problems with the confounding of state dependence and consumer heterogeneity, loyalty must be measured in a model which allows for an unknown and possibly highly non-normal distribution of heterogeneity. We implement a highly flexible model of heterogeneity using multivariate mixtures of normals in a hierarchical choice model. We find important deviations from the standard one component normal mixture.

Number of Pages in PDF File: 42

Keywords: Dynamic pricing, loyalty, state dependence, consumer heterogeneity

JEL Classification: M3, D1, D4

working papers series


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Date posted: January 14, 2006  

Suggested Citation

Dube, Jean-Pierre H. and Hitsch, Guenter J. and Rossi , Peter E. and Vitorino, Maria Ana, Category Pricing with State Dependent Utility (December 2006). Available at SSRN: http://ssrn.com/abstract=875125 or http://dx.doi.org/10.2139/ssrn.875125

Contact Information

Jean-Pierre H. Dube
University of Chicago - Booth School of Business ( email )
5807 South Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://gsb.uchicago.edu/fac/jean-pierre.dube
Guenter J. Hitsch
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
Peter E. Rossi (Contact Author)
University of California, Los Angeles (UCLA) - Anderson School of Management ( email )
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
773-294-8616 (Phone)
Maria Ana Vitorino
University of Minnesota - Carlson School of Management ( email )
3-150 Carlson School of Management
321 - 19th Avenue South
Minneapolis, MN 55455
United States
HOME PAGE: http://www.tc.umn.edu/~vitorino/
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References:  14
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