Estimating Demand for Differentiated Products with Continuous Choice and Variety-Seeking: An Application to the Puzzle of Uniform Pricing
164 Pages Posted: 28 Nov 2006
Date Written: March 2005
Retailers typically sell many different products from the same manufacturer at the same price. I consider retailer-based explanations for this uniform pricing puzzle, estimating the counterfactual profits that would be lost by a retailer switching from a non-uniform to a uniform pricing regime in the carbonated soft drink category. In order to calculate this profit difference, I develop a new structural model of demand that improves on existing work by more closely matching several key features of the data. These key features include the fact that households may be variety-seeking, that they make continuous choices, and that they choose from a large number of products. Using household-level panel data on purchases of carbonated soft drinks, I estimate that the retail store I observe earned an additional $36.56 (1992 dollars) in average weekly profits by charging non-uniform prices. This corresponds to roughly a 3% difference in profits, and suggests that when a retail store faces even a relatively small cost to determine the optimal set of non-uniform prices, it may be optimal to charge the same price for many products.
Keywords: pricing, line pricing, flavors, differentiated products, method of simulated moments, retail, grocery, engel curve, menu cost
JEL Classification: C13, C33, D12, D43, D81
Suggested Citation: Suggested Citation