Document Type

Working Paper

Date

1-2013

Keywords

Varieties, Product Line, Consumer Surplus, Welfare, Demand, Order Statistics

Language

English

Series

Working Papers Series

Disciplines

Economic Policy | Economics | Public Affairs, Public Policy and Public Administration

Description/Abstract

We use order statistics to analytically derive demand functions when consumers choose from among the varieties of two brands—such as Coke and Pepsi—and an outside good. Soft-drinks have no price variability across varieties within a brand, so traditional demand systems (e.g., mixed logit) are not identified. In contrast, our demand system is identified and can be estimated using a nonlinear instrumental variable estimator. Our demand functions are higher-order polynomials, where the polynomial order is increasing in variety. Because these demand curves have convex and concave sections around an inflection point, firms are more likely to respond and make large price adjustments to increases in cost than to comparable decreases in costs. We compare the profit-maximizing number of varieties within a grocery store to the socially optimal number and find that consumer surplus and welfare would increase with more variety.

ISSN

1525-3066

Additional Information

Working paper no. 152

The authors are grateful to Brian Wright for extremely helpful advice on welfare issues and to George Judge and Derek Laing for insightful discussions on order statistics.

Source

Local input

Creative Commons License

Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.

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