IDEAS home Printed from https://ideas.repec.org/p/isu/genstf/202001010800001008.html
   My bibliography  Save this paper

Optimal pricing strategies for a cluster of goods: own- and cross-price effects with correlated tastes

Author

Listed:
  • Rosas, Francisco
  • Acerenza, Santiago
  • Orazem, Peter F.

Abstract

Contingent valuation methods are used to identify observed and unobserved preferences of goods and services. We apply these methods, in the context of multivariate probit analysis, to compute willingness to pay for each product of a cluster of goods conditional on having purchased another offered good of the cluster. We also provide a derivation of compensated cross-price elasticities based on unobservable factors, proving to be convenient in situations where cross-prices are not part of the demand equations. As goods belonging to a cluster typically embed correlated taste, their pricing strategy should consider all offered goods simultaneously rather than individually. Therefore, we solve for the set of optimal prices of a social planner whose objective function weights both the producer’s revenues and the consumer’s joint latent utility. We show an application to collegiate sports events, but these methods can be extended in a straightforward fashion to other goods and services. Supplementary materials for this article are available online.

Suggested Citation

  • Rosas, Francisco & Acerenza, Santiago & Orazem, Peter F., 2020. "Optimal pricing strategies for a cluster of goods: own- and cross-price effects with correlated tastes," ISU General Staff Papers 202001010800001008, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genstf:202001010800001008
    as

    Download full text from publisher

    File URL: https://dr.lib.iastate.edu/server/api/core/bitstreams/1e716d33-13c9-4df2-9b16-af4c66811180/content
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lorenzo Cappellari & Stephen P. Jenkins, 2006. "Calculation of multivariate normal probabilities by simulation, with applications to maximum simulated likelihood estimation," Stata Journal, StataCorp LP, vol. 6(2), pages 156-189, June.
    2. Maynard, Leigh J. & Hartell, Jason G. & Meyer, A. Lee & Hao, Jianqiang, 2004. "An experimental approach to valuing new differentiated products," Agricultural Economics, Blackwell, vol. 31(2-3), pages 317-325, December.
    3. Richard Carson & Nicholas Flores & Norman Meade, 2001. "Contingent Valuation: Controversies and Evidence," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 19(2), pages 173-210, June.
    4. Balia, Silvia & Jones, Andrew M., 2008. "Mortality, lifestyle and socio-economic status," Journal of Health Economics, Elsevier, vol. 27(1), pages 1-26, January.
    5. Contoyannis, Paul & Jones, Andrew M., 2004. "Socio-economic status, health and lifestyle," Journal of Health Economics, Elsevier, vol. 23(5), pages 965-995, September.
    6. Cameron, Trudy Ann, 1988. "A new paradigm for valuing non-market goods using referendum data: Maximum likelihood estimation by censored logistic regression," Journal of Environmental Economics and Management, Elsevier, vol. 15(3), pages 355-379, September.
    7. Bruce K. Johnson & Peter A. Groothuis & John C. Whitehead, 2000. "“The Value of Public Goods Generated by a Major League Sports Team: The CVM Approach,”," Working Papers 0014, East Carolina University, Department of Economics.
    8. Jayson L. Lusk & Ted C. Schroeder, 2004. "Are Choice Experiments Incentive Compatible? A Test with Quality Differentiated Beef Steaks," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(2), pages 467-482.
    9. Ronald G. Cummings & Philip T. Ganderton & Thomas McGuckin, 1994. "Substitution Effects in CVM Values," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 205-214.
    10. Francisco Rosas & Peter F. Orazem, 2014. "Is Self-Sufficiency for Women’s Collegiate Athletics a Hoop Dream? Willingness to Pay for Men’s and Women’s Basketball Tickets," Journal of Sports Economics, , vol. 15(6), pages 579-600, December.
    11. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555.
    12. Office of Health Economics, 2007. "The Economics of Health Care," For School 001490, Office of Health Economics.
    13. Awad Mataria & Stéphane Luchini & Yousef Daoud & Jean-Paul Moatti, 2007. "Demand assessment and price-elasticity estimation of quality-improved primary health care in palestine: a contribution from the contingent valuation method," Health Economics, John Wiley & Sons, Ltd., vol. 16(10), pages 1051-1068.
    14. Bruce K. Johnson & Peter A. Groothuis & John C. Whitehead, 2001. "The Value of Public Goods Generated by a Major League Sports Team," Journal of Sports Economics, , vol. 2(1), pages 6-21, February.
    15. BK. Johnson & JC. Whitehead, 2000. "Value of public goods from sports stadiums: the CVM approach," Contemporary Economic Policy, Western Economic Association International, vol. 18(1), pages 48-58, January.
    16. Amemiya, Takeshi, 1978. "The Estimation of a Simultaneous Equation Generalized Probit Model," Econometrica, Econometric Society, vol. 46(5), pages 1193-1205, September.
    17. Awad Mataria & Stéphane Luchini & Yousef Daoud & Jean‐Paul Moatti, 2007. "Demand assessment and price‐elasticity estimation of quality‐improved primary health care in palestine: a contribution from the contingent valuation method," Health Economics, John Wiley & Sons, Ltd., vol. 16(10), pages 1051-1068, October.
    18. Bruce K. Johnson & John C. Whitehead & Daniel S. Mason & Gordon J. Walker, 2007. "Willingness To Pay For Amateur Sport And Recreation Programs," Contemporary Economic Policy, Western Economic Association International, vol. 25(4), pages 553-564, October.
    19. Puneet Manchanda & Asim Ansari & Sunil Gupta, 1999. "The “Shopping Basket”: A Model for Multicategory Purchase Incidence Decisions," Marketing Science, INFORMS, vol. 18(2), pages 95-114.
    20. Young, Gary & Valdez, Emiliano A. & Kohn, Robert, 2009. "Multivariate probit models for conditional claim-types," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 214-228, April.
    21. Carlos E. Carpio & Olga Isengildina-Massa, 2009. "Consumer willingness to pay for locally grown products: the case of South Carolina," Agribusiness, John Wiley & Sons, Ltd., vol. 25(3), pages 412-426.
    22. Greene,William H. & Hensher,David A., 2010. "Modeling Ordered Choices," Cambridge Books, Cambridge University Press, number 9780521142373, October.
    23. Shi, Lijia & Gao, Zhifeng & Chen, Xuqi, 2014. "The cross-price effect on willingness-to-pay estimates in open-ended contingent valuation," Food Policy, Elsevier, vol. 46(C), pages 13-21.
    24. Stina Hökby & Tore Söderqvist, 2003. "Elasticities of Demand and Willingness to Pay for Environmental Services in Sweden," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 26(3), pages 361-383, November.
    25. Peter A. Diamond & Jerry A. Hausman, 1994. "Contingent Valuation: Is Some Number Better than No Number?," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 45-64, Fall.
    26. Greene,William H. & Hensher,David A., 2010. "Modeling Ordered Choices," Cambridge Books, Cambridge University Press, number 9780521194204, October.
    27. Briscoe, John, et al, 1990. "Toward Equitable and Sustainable Rural Water Supplies: A Contingent Valuation Study in Brazil," The World Bank Economic Review, World Bank Group, vol. 4(2), pages 115-134, May.
    28. Kerwin Kofi Charles & Jonathan Guryan, 2008. "Prejudice and Wages: An Empirical Assessment of Becker's The Economics of Discrimination," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 773-809, October.
    29. Christofides, Louis N. & Stengos, Thanasis & Swidinsky, Robert, 1997. "On the calculation of marginal effects in the bivariate probit model," Economics Letters, Elsevier, vol. 54(3), pages 203-208, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wei, Xiaohan & Chen, Xuqi & Gao, Zhifeng & Jensen, Kimberly L. & Yu, Tun-Hsiang & DeLong, Karen L., 2020. "The Reference Price Effect on Willingness-to-Pay Estimates: Evidence from Eco-labeled Food Products," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304573, Agricultural and Applied Economics Association.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wicker, Pamela & Kiefer, Stephanie & Dilger, Alexander, 2013. "The value of sporting success to Germans: Comparing the 2012 UEFA Championships with the 2012 Olympics," Discussion Papers of the Institute for Organisational Economics 11/2013, University of Münster, Institute for Organisational Economics.
    2. O. Ashton Morgan & John C. Whitehead, 2018. "Willingness to Pay for Soccer Player Development in the United States," Journal of Sports Economics, , vol. 19(2), pages 279-296, February.
    3. Brad R. Humphreys & Bruce K. Johnson & Daniel S. Mason & John C. Whitehead, 2011. "Estimating the Value of Medal Success at the 2010 Winter Olympic Games," Working Papers 11-20, Department of Economics, Appalachian State University.
    4. Funahashi, Hiroaki & Shibli, Simon & Sotiriadou, Popi & Mäkinen, Jarmo & Dijk, Bake & De Bosscher, Veerle, 2020. "Valuing elite sport success using the contingent valuation method: A transnational study," Sport Management Review, Elsevier, vol. 23(3), pages 548-562.
    5. John R. Crooker & Aju J. Fenn, 2008. "Estimating Local Welfare Generated by a Professional Sports Team: An Application to the Minnesota Vikings under Threat of Relocation," Working Papers 0805, University of Central Missouri, Department of Economics & Finance, revised May 2008.
    6. Haghani, Milad & Sarvi, Majid, 2018. "Hypothetical bias and decision-rule effect in modelling discrete directional choices," Transportation Research Part A: Policy and Practice, Elsevier, vol. 116(C), pages 361-388.
    7. Giles Atkinson & Susana Mourato & Stefan Szymanski & Ece Ozdemiroglu, 2008. "Are We Willing to Pay Enough to `Back the Bid'?: Valuing the Intangible Impacts of London's Bid to Host the 2012 Summer Olympic Games," Urban Studies, Urban Studies Journal Limited, vol. 45(2), pages 419-444, February.
    8. Bruce Johnson & Mike Mondello & John C. Whitehead, 2004. "Contingent Valuation of Sports Stadiums and Arenas: Temporal Embedding and Order Effect," Working Papers 04-15, Department of Economics, Appalachian State University, revised 2005.
    9. J. Lucy Lee & Jeffrey D. James, 2015. "Assessing sport brand value through use of the contingent valuation method," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 3(6), pages 33-44, December.
    10. Harry Walton & Alberto Longo & Peter Dawson, 2008. "A Contingent Valuation of the 2012 London Olympic Games," Journal of Sports Economics, , vol. 9(3), pages 304-317, June.
    11. Yamada, Katsunori & Sato, Masayuki, 2013. "Another avenue for anatomy of income comparisons: Evidence from hypothetical choice experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 35-57.
    12. Chavez, Daniel E. & Palma, Marco A. & Nayga, Rodolfo M. & Mjelde, James W., 2020. "Product availability in discrete choice experiments with private goods," Journal of choice modelling, Elsevier, vol. 36(C).
    13. Pamela Wicker & John C. Whitehead & Bruce K. Johnson & Daniel S. Mason, 2016. "Willingness-To-Pay For Sporting Success Of Football Bundesliga Teams," Contemporary Economic Policy, Western Economic Association International, vol. 34(3), pages 446-462, July.
    14. Kaili Wang & Sanjana Hossain & Khandker Nurul Habib, 2022. "A hybrid data fusion methodology for household travel surveys to reduce proxy biases and under-representation of specific sub-group of population," Transportation, Springer, vol. 49(6), pages 1801-1836, December.
    15. Pierre-Alexandre Mahieu & Romain Craste & Bengt Kriström & Pere Riera, 2014. "Non-market valuation in France: An overview of the research activity," Working Papers hal-01087365, HAL.
    16. Bernd Süssmuth & Malte Heyne & Wolfgang Maennig, 2010. "Induced Civic Pride and Integration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(2), pages 202-220, April.
    17. Falco, Paolo & Maloney, William F. & Rijkers, Bob & Sarrias, Mauricio, 2015. "Heterogeneity in subjective wellbeing: An application to occupational allocation in Africa," Journal of Economic Behavior & Organization, Elsevier, vol. 111(C), pages 137-153.
    18. Ermagun, Alireza & Stathopoulos, Amanda, 2018. "To bid or not to bid: An empirical study of the supply determinants of crowd-shipping," Transportation Research Part A: Policy and Practice, Elsevier, vol. 116(C), pages 468-483.
    19. Mohit Batham & Soudeh Mirghasemi & Mohammad Arshad Rahman & Manini Ojha, 2021. "Modeling and Analysis of Discrete Response Data: Applications to Public Opinion on Marijuana Legalization in the United States," Papers 2109.10122, arXiv.org, revised May 2023.
    20. Brad R. Humphreys & Adam Nowak, 2015. "Professional Sports Facilities, Teams and Property Values: Evidence from Seattle's Key Arena," Working Papers 15-06, Department of Economics, West Virginia University.

    More about this item

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General
    • Z20 - Other Special Topics - - Sports Economics - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:isu:genstf:202001010800001008. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Curtis Balmer (email available below). General contact details of provider: https://edirc.repec.org/data/deiasus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.