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Price Discrimination in the Steel Market


  • John Rust
  • Hui Man Chan
  • George Hall


This paper estimates a dynamic model of price discrimination and inventory investment under incomplete information. The model is motivated from an empirical analysis of operations of daily observations on inventories, sales, and purchases of over 2,300 individual products by a U.S. steel wholesaler. The model assumes the wholesaler has a distribution of beliefs about each retail customer's reservation values and posts individual take-it-or-leave-it offers to maximize discounted profits while simultaneously accounting for the firm's optimal inventory decisions. This model is compared to the case in which the the firm must post a uniform price to all customers. We simulate the estimated model and find that the simulated data exhibit the key features of inventory investment and pricing behavior we observe in the data.

Suggested Citation

  • John Rust & Hui Man Chan & George Hall, 2004. "Price Discrimination in the Steel Market," 2004 Meeting Papers 44, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:44

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    References listed on IDEAS

    1. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 0171, European Central Bank.
    2. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
    3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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    7. Yongsung Chang & Joao F. Gomes & Frank Schorfheide, 2002. "Learning-by-Doing as a Propagation Mechanism," American Economic Review, American Economic Association, vol. 92(5), pages 1498-1520, December.
    8. Frank Smets & Raf Wouters, 2004. "Forecasting with a Bayesian DSGE Model: An Application to the Euro Area," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 841-867, November.
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    Cited by:

    1. George Hall and John Rust, Yale University, 2001. "Econometric Methods for Endogenously Sampled Time Series: The Case of Commodity Price Speculation in the Steel Market," Computing in Economics and Finance 2001 274, Society for Computational Economics.
    2. Adam Copeland & George Hall, 2011. "The response of prices, sales, and output to temporary changes in demand," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(2), pages 232-269, March.
    3. Graddy, Kathryn & Hall, George, 2011. "A dynamic model of price discrimination and inventory management at the Fulton Fish Market," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 6-19.
    4. Sule Alan, 2012. "Do disaster expectations explain household portfolios?," Quantitative Economics, Econometric Society, vol. 3(1), pages 1-28, March.
    5. Adam Copeland & Wendy E. Dunn & George J. Hall, 2005. "Prices, production, and inventories over the automotive model year," Finance and Economics Discussion Series 2005-25, Board of Governors of the Federal Reserve System (U.S.).
    6. Sofia Berto Villas-Boas, 2009. "An empirical investigation of the welfare effects of banning wholesale price discrimination," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 20-46.
    7. Michel Mouchart & Marie Vandresse, 2007. "Bargaining powers and market segmentation in freight transport," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1295-1313.

    More about this item


    inventories; yield management; dyanmic programming;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity


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