ESSAYS ON PRICE DISCRIMINATION AND DEMAND LEARNING

• Main Author: Wallace, Benjamin E.
• Format: Others
• Published: UKnowledge 2019
• Subjects: Price Discrimination; Nonlinear Pricing; Demand Learning; Industrial Organization; Structural Modeling; Economics
• Online Access: https://uknowledge.uky.edu/economics_etds/40; https://uknowledge.uky.edu/cgi/viewcontent.cgi?article=1040&context=economics_etds

This dissertation consists of three essays examining how and why firms set prices in markets. In particular, this dissertation shows how firms may utilize nonlinear pricing to price discriminate, how firms may experiment with the prices they set to learn about the demand function in the market they serve in later periods and the effects of these pricing strategies on consumer welfare. In Essay 1, I show how firms in the milk market use nonlinear price schedules -- quantity discounts -- to price discriminate and increase profits. I find that firms have a greater ability to price discriminate on their own ``private label'' products rather than regional branded that they sell alongside their own. Though some consumers benefit from a lower price as a result of the price discrimination, total consumer surplus is lower than if the store had to offer a fixed price per unit. Additionally, I compare my structural demand estimates, which using the Nielsen household panel data include consumer demographic information and actual household choices, to the standard approach in the literature on price discrimination that uses only market level data. By doing so I find that ignoring demographic information and actual consumer choices leads to biased parameter estimates. In the case of the milk market, the biased parameter estimates due to ignoring household demographic information and actual consumer choices lead to underestimating welfare harm to consumers on average. After finding that price discrimination harms consumers overall in this market, I quantify which consumer demographic are better off and which are worse off. I find that households with children and low income households with children are the only households to benefit from the price discriminatory practices of firms in this market. Since these groups are particularly vulnerable, I suggest that policymakers take no action to correct this market, as any action will directly hurt these consumer groups. In Essay 2, I study how firms learn about the demand in a new market by exploiting a significant change in Washington's state's liquor laws. In 2012, the state of Washington switched from a price-controlled state-store system of selling liquor to one in which private sellers could sell liquor with minimal restrictions on price and range of products. As a result, a heterogeneous group of firms entered the liquor market across the state with little knowledge of the regional demand for alcohol in the state of Washington across heterogeneous localities. Using the Nielsen retail scanner data I am able to observe the variation in pricing and offerings seasonally and over time to see if there is convergence in offerings and prices, and how quickly that convergence occurs across different localities depending on local demographics and competition. I also investigate the extent to which the variation is "experimentation'' by the firms, i.e., the firms purposely experimenting to learn more about demand and the extent that local demographics and competition can affect the experimentation and whether there are spill-overs from local competition (i.e. do firms learn from each other and does this effect how much they experiment and how quickly they learn). My main findings are that over time, firms within this market have learned better how to price discriminate over the holiday season; firms experiment more with prices for the pint sized products than the larger sizes; and that menu of options that firms have offered has been expanding but at a slower rate, suggesting that they are approaching a long-run steady state for the optimal menu of options.