Non‐Linear Pricing and Price Indexes: Evidence and Implications from Scanner Data

18 Pages Posted: 10 May 2014

See all articles by Kevin J. Fox

Kevin J. Fox

UNSW Australia Business School, School of Economics

Daniel Melser

Moody's Economy.com

Date Written: June 2014

Abstract

Non‐linear pricing, the fact that prices do not necessarily change in proportion to size, is a ubiquitous phenomenon. However, it has been neither particularly well understood nor well measured. Non‐linear pricing is of practical importance for statistical agencies who, in constructing price indexes, are often required to compare the relative price of a product‐variety of two different sizes. It is usually assumed that prices change one‐for‐one with package and pack size (e.g. a 1‐liter cola costs half as much as a 2‐liter bottle). We question the wisdom of such an assumption and outline a model to flexibly estimate the price‐size function. Applying our model to a large U.S. scanner dataset for carbonated beverages, at a disaggregated level, we find very significant discounts for larger‐sized products. This highlights the need to pursue methods such as those advocated in this paper.

Keywords: hedonic regression, local regression, non‐linear pricing, quantity discount

JEL Classification: C43, C50, D00, E31

Suggested Citation

Fox, Kevin J. and Melser, Daniel, Non‐Linear Pricing and Price Indexes: Evidence and Implications from Scanner Data (June 2014). Review of Income and Wealth, Vol. 60, Issue 2, pp. 261-278, 2014. Available at SSRN: https://ssrn.com/abstract=2435350 or http://dx.doi.org/10.1111/roiw.12000

Kevin J. Fox (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia
(02)9385-3320 (Phone)
(02)9313-6337 (Fax)

Daniel Melser

Moody's Economy.com ( email )

Level 10
1 O'Connell St
SYDNEY, 2000
Australia

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