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Abstract

In chapter 1, I study sales of larger packages with quantity surcharge. Sales of larger packages with quantity surcharges occur often in the consumer packaged goods industry. This phenomenon poses a challenge to rationalizing consumer behaviors because the same amount of an identical product can be bought at a cheaper price. I present evidence that consumers lose a considerable amount of money by purchasing quantity surcharged larger packages. I develop and estimate a structural econometric model that combines (i) rationally inattentive consumers with (ii) the address model of consumer demand in the product characteristics space. By simulating consumer demand using model parameter estimates, I decompose the contribution of information friction and preference heterogeneity over package sizes on sales of larger packages with quantity surcharges. The estimated model predicts that only 40% of sales of larger packages with quantity surcharges can be attributed to information friction. I suggest revenue-improving, nonlinear pricing schemes that preserve consumer welfare at the current level. Under the pricing schemes, retailers can raise their revenues by up to 18%, and the corresponding sales of larger packages with quantity surcharge triples. As a methodological contribution, I state and prove the theorem that allows estimating the Rational Inattention (RI) model as if estimating an augmented logit model. In chapter 2 (coauthored with Ali Hortacsu), we study the relation between logit demand systems and constant elasticity of substitution (CES) demand systems. We develop a characteristics based demand estimation framework for the Marshallian demand system obtained by solving a budget-constrained constant elasticity of substitution (CES) utility maximization problem. From our Marshallian CES demand system, we derive the same market share equation of Berry (1994), Berry et al. (1995)'s characteristics based logit demand system. Furthermore, our CES demand estimation framework can accommodate zero predicted and observed market shares by separating intensive and extensive margins, and allows a semiparametric estimation strategy that is flexible regarding the distribution of unobservable product characteristics. We apply the framework to scanner data on cola sales, where we show estimated demand curves can be upward sloping if zero market shares are not accommodated properly.

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