Learning to Set Prices in the Washington State Liquor Market

63 Pages Posted: 9 Nov 2018

See all articles by Yufeng Huang

Yufeng Huang

University of Rochester - Simon Business School

Paul B. Ellickson

University of Rochester - Simon Business School

Mitchell J. Lovett

Simon School of Business – University of Rochester

Date Written: October 8, 2018

Abstract

How do new entrants learn about demand and adapt to new market conditions? We study retail prices in the Washington State liquor market where privatization led existing grocery chains to enter this market for the first time. We document large price changes across a broad range of products and provide novel evidence showing that these changes result from retailers learning about demand: prices absorb realized demand shocks, adjusting to better reflect demand primitives. We then estimate a structural model that imposes minimal assumptions on the optimality of observed prices. Comparing against the full-information optimal prices implied by the model, we find that learning continues to occur even years after entering the new market, and the limited demand information initially causes up to 13% lower profit compared to full information. Further, empirical pricing patterns suggest that retailers learn about both levels and the slope of demand, and learn from both own experience and practices of others.

Suggested Citation

Huang, Yufeng and Ellickson, Paul B. and Lovett, Mitch, Learning to Set Prices in the Washington State Liquor Market (October 8, 2018). Available at SSRN: https://ssrn.com/abstract=3267701 or http://dx.doi.org/10.2139/ssrn.3267701

Yufeng Huang (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://https://sites.google.com/site/yufenghuangphd/

Paul B. Ellickson

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Mitch Lovett

Simon School of Business – University of Rochester ( email )

300 Crittenden Blvd.
Rochester, NY 14627
United States

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