Price Discrimination in the Steel Market
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.
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