An Empirical Model of Quantity Discounts with Large Choice Sets

Abstract

We introduce a Generalized Nested Logit model of demand for bundles that can be estimated sequentially, eliminating the challenge of dimensionality due to large choice sets. We use it to investigate quantity discounts for carbonated soft drinks by simulating a counterfactual with linear pricing. The prices of quantities up to 1L decrease by -31.21% while those of larger quantities increase by +20.82%. Purchased quantities decrease by -24.24% and industry profit by -21.87%. Consumer surplus however reduces only moderately, suggesting that a ban on quantity discounts for sugary drinks may be a simple and effective policy to limit added sugar intake. Our calculations confirm that such a ban would indeed be as effective as a sugar tax of 1 cent per ounce of added sugar and reduce added sugar intake by -22.35%.

Keywords: Quantity Discounts, Large Choice Sets, Purchase of Multiple Units, Generalized Nested Logit, Carbonated Soft Drinks, Sugar Taxes.

JEL Classification: C55, C63, L4, L13, L66