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Variety: Consumer Choice and Optimal Diversity

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Author Info

  • William C. Horrace

    ()
    (Syracuse University)

  • Rui Huang

    ()
    (University of Connecticut)

  • Jeffrey M. Perloff

    ()
    (University of California, Berkeley)

Abstract

Consumers choose from among the varieties of two brands and an outside good using order statistics. We analytically derive demand functions conditional on their valuations of the varieties being distributed independently uniform. Based on this theory, we estimate a threeparameter empirical version of the model for the soft-drink market. These estimates are used to determine the effects of changes in the number of varieties on demand curves and consumer welfare. We use our estimates to 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.

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File URL: http://fmpc.uconn.edu/publications/rr/rr115.pdf
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Bibliographic Info

Paper provided by University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy in its series Food Marketing Policy Center Research Reports with number 115.

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Length: 40 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:zwi:fpcrep:115

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Postal: 1376 Storrs Road, U-21, Storrs, Connecticut 06269-4021
Phone: 860-486-2836
Fax: 860-486-1932
Web page: http://www.zwickcenter.uconn.edu
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Related research

Keywords: varieties; product line length; consumer surplus; welfare; demand; order statistics; oligopolistic;

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References

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  1. Golan, Amos & Karp, Larry S & Perloff, Jeffrey M, 2000. "Estimating Coke's and Pepsi's Price and Advertising Strategies," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(4), pages 398-409, October.
  2. Aviv Nevo, 2001. "New Products, Quality Changes and Welfare Measures Computed From Estimated Demand Systems," NBER Working Papers 8425, National Bureau of Economic Research, Inc.
  3. Gasmi, F & Laffont, J J & Vuong, Q, 1992. "Econometric Analysis of Collusive Behavior in a Soft-Drink Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 277-311, Summer.
  4. Richard J. Gilbert and Carmen Matutes., 1989. "Product Line Rivalry with Brand Differentiation," Economics Working Papers 89-103, University of California at Berkeley.
  5. Michaela Draganska & Dipak C. Jain, 2005. "Product-Line Length as a Competitive Tool," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 1-28, 03.
  6. Deneckere, Raymond J & Rothschild, Michael, 1992. "Monopolistic Competition and Preference Diversity," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 361-73, April.
  7. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
  8. 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.
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