Effects of Increased Variety on Demand, Pricing, and Welfare
AbstractWe use order statistics to analytically derive demand functions when consumers choose from among the varieties of two brands—such as Coke and Pepsi—and an outside good. Soft-drinks have no price variability across varieties within a brand, so traditional demand systems (e.g., mixed logit) are not identified. In contrast, our demand system is identified and can be estimated using a nonlinear instrumental variable estimator. Our demand functions are higher-order polynomials, where the polynomial order is increasing in variety. Because these demand curves have convex and concave sections around an inflection point, firms are more likely to respond and make large price adjustments to increases in cost than to comparable decreases in costs. We compare the profit-maximizing number of varieties within a grocery store to the socially optimal number and find that consumer surplus and welfare would increase with more variety. Key Words: Varieties, Product Line, Consumer Surplus, Welfare, Demand, Order Statistics JEL No. L11, L66, D11
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 152.
Length: 46 pages
Date of creation: Jan 2013
Date of revision:
Contact details of provider:
Postal: 426 Eggers Hall, Syracuse, New York USA 13244-1020
Phone: (315) 443-3114
Fax: (315) 443-1081
Web page: http://www.maxwell.syr.edu/cpr.aspx
More information through EDIRC
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-26 (All new papers)
- NEP-COM-2013-09-26 (Industrial Competition)
- NEP-IPR-2013-09-26 (Intellectual Property Rights)
- NEP-MKT-2013-09-26 (Marketing)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Richard J. Gilbert and Carmen Matutes., 1989.
"Product Line Rivalry with Brand Differentiation,"
Economics Working Papers
89-103, University of California at Berkeley.
- J. Miguel Villas-Boas, 2004. "Communication Strategies and Product Line Design," Marketing Science, INFORMS, vol. 23(3), pages 304-316, January.
- Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
- Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-68, September.
- Raubitschek, Ruth S, 1987. "A Model of Product Proliferation with Multiproduct Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 35(3), pages 269-79, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kelly Bogart) or (Katrina Wingle).
If references are entirely missing, you can add them using this form.