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To Price Discriminate or Not: Product Choice and the Selection Bias Problem

  • Ganesh Iyer

    ()

  • P.B. Seetharaman

    ()

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    In this paper, we investigate a gasoline station's incentive to price-discriminate by selling full-service gasoline as well as self-service gasoline. Unlike previous research, we explicitly model a firm's incentive to price discriminate by choosing to be either single-product or multi-product as a function of market and station characteristics. This allows us to make two contributions to research in the area: First, we highlight the importance of accounting for self-selectivity considerations that can arise in an empirical analysis of price discrimination that is based on market data. Second, we are able to show how the product and pricing choices of firms depend upon the market characteristics. Using cross-sectional survey data on prices, station and market characteristics for 198 gasoline stations in the Greater Saint Louis area, we estimate a switching regression model of station decisions. Specifically, we employ a binary probit framework that models a station's decision to price-discriminate through the choice of the station-type as a function of market and station characteristics. We then estimate conditional linear regressions with self-selectivity corrections for the station's choice of prices. We show that incorrect inferences about the incentive to price discriminate and about the differences in the prices charged between single-product and multi-product stations would result if the endogeneity in the choice of the station-type were ignored in the estimation. The empirical analysis shows that a larger income spread in the market implies a greater likelihood of the gasoline station being multi-product. In addition, we have support for the various within firm and across firm price differentials as predicted by the theory of price discrimination. Copyright Kluwer Academic Publishers 2003

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    File URL: http://hdl.handle.net/10.1023/A:1024656413074
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    Article provided by Springer in its journal Quantitative Marketing and Economics.

    Volume (Year): 1 (2003)
    Issue (Month): 2 (June)
    Pages: 155-178

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    Handle: RePEc:kap:qmktec:v:1:y:2003:i:2:p:155-178
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    1. K. Sridhar Moorthy, 1984. "Market Segmentation, Self-Selection, and Product Line Design," Marketing Science, INFORMS, vol. 3(4), pages 288-307.
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    4. Preyas S. Desai, 2001. "Quality Segmentation in Spatial Markets: When Does Cannibalization Affect Product Line Design?," Marketing Science, INFORMS, vol. 20(3), pages 265-283, August.
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    6. Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 277-311.
    7. Hanemann, W Michael, 1984. "Discrete-Continuous Models of Consumer Demand," Econometrica, Econometric Society, vol. 52(3), pages 541-61, May.
    8. Png, I P L & Reitman, David, 1995. "Why Are Some Products Branded and Others Not?," Journal of Law and Economics, University of Chicago Press, vol. 38(1), pages 207-24, April.
    9. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492 National Bureau of Economic Research, Inc.
    10. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
    11. Aviv Nevo & Catherine Wolfram, 2002. "Why Do Manufacturers Issue Coupons? An Empirical Analysis of Breakfast Cereals," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 319-339, Summer.
    12. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
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