Capturing Flexible Price Elasticities in Direct Utility Models

27 Pages Posted: 20 Mar 2020

See all articles by Chul Kim

Chul Kim

City University of New York - Allen G. Aaronson Department of Marketing & International Business

Adam N. Smith

University College London - UCL School of Management

Jaehwan Kim

Korea University Business School (KUBS)

Greg M. Allenby

Ohio State University (OSU) - Department of Marketing and Logistics

Date Written: February 6, 2020

Abstract

This paper investigates the role of the outside good utility function on admissible substitution patterns in direct utility models of discrete/continuous demand. We first present a set of novel results that characterize the functional form of price effects within this class of models. The results highlight the relative inflexibility of many standard outside good utility functions. We then propose a new outside good utility function that admits more flexible marginal utility curves. Our empirical analysis uses household scanner panel data from the potato chip category, where we find empirical support for non-standard rates of satiation for the outside good. We then show how the restrictive substitution patterns induced by standard utility specifications may distort price elasticities and optimal pricing decisions.

Keywords: Outside good, satiation, multiple discreteness, price elasticity, category pricing

Suggested Citation

Kim, Chul and Smith, Adam N. and Kim, Jaehwan and Allenby, Greg M., Capturing Flexible Price Elasticities in Direct Utility Models (February 6, 2020). Available at SSRN: https://ssrn.com/abstract=3539001 or http://dx.doi.org/10.2139/ssrn.3539001

Chul Kim

City University of New York - Allen G. Aaronson Department of Marketing & International Business

One Bernard Baruch Way, B12-240
New York, NY 10010-5585
United States

Adam N. Smith (Contact Author)

University College London - UCL School of Management

One Canada Square
London, E14 5AA
United Kingdom

Jaehwan Kim

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea
822.3290.2603 (Phone)
822.922.7220 (Fax)

Greg M. Allenby

Ohio State University (OSU) - Department of Marketing and Logistics ( email )

Fisher Hall 524
2100 Neil Ave
Columbus, OH 43210
United States

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