Date of Award
Olin Business School
Doctor of Philosophy (PhD)
In empirical marketing literature, it is well documented that most of the frequently consumed packaged good categories are governed by inertia that is the phenomenon of consumers often repeat-purchasing the same brand on successive purchase occasions. Under such inertial behavior, market-level demand becomes to be correlated over time, i.e., if the demand of a brand is high in a given week, it is likely to remain high in the ensuing weeks. The pricing implication of such inertia is, for instance, a current retail price cut for a brand not only increase its demand in the current week, but also increase its demand in the ensuing weeks (given that there is no price response from the competitors). Therefore, pricing decisions become dynamic under inertial demand. Even though the phenomenon of inertia has been widely documented at the empirical choice domain, the pricing implications of such inertia have been mostly limited to the analytical area. Therefore, the objective of my dissertation work is to fill this gap in the dynamic empirical pricing domain.
Normative analytical models of oligopolistic pricing account for the fact that in such inertial markets, competing manufacturers have, on the one hand, an incentive to price low in order to invest in building consumer demand for the future, but, on the other hand, an incentive to price high in order to harvest the reduced price-sensitivity of its existing inertial customers. In Essay 1 of this dissertation, I estimate a structural econometric model of oligopolistic pricing and, on that basis, explicitly disentangle the relative impacts of the two opposing, i.e., investing versus harvesting, incentives on the pricing decisions of cola manufacturers. From our analysis, we find that the net impact of the harvesting and investing incentives in our data is that the equilibrium prices of both brands are lower than those in the absence of inertia (by 4.6% and 3.1% of costs, for Coke and Pepsi, respectively).
Over the past decade, the marketing literature has been enriched by the development of structural econometric models of prices in the distribution channel (Kadiyali, Chintagunta and Vilcassim (2000), Sudhir (2001), Villas-Boas and Zhao (2005), Villas-Boas (2007), Che, Sudhir and Seetharaman (2007), Draganska, Klapper and Villas-Boas (2010)). These models, which derive the wholesale pricing incentives for brand manufacturers, together with the retail pricing incentives for retailers, have typically ignored the existence of inertial demand. In Essay 2 of this dissertation, I advance the literature by developing a structural econometric model of prices in the distribution channel in the presence of inertial demand. From our analysis, we find that the net impact of the harvesting and investing incentives in our data is that the channel profit margin of Coke is lower by 3c, while the channel profit of Pepsi is the same as, the corresponding margin in the absence of inertia. We also find the retailer effectively free rides on the manufacturers' efforts by taking a lion's share of the additional profits that accrue to the channel from the existence of inertial demand.
Chair and Committee
Tat Y. Chan, P.B. Seetharaman
Selin Malkoc, Alvin Murphy, John Nachbar, Chakravarthi Narasimhan
Cosguner, Koray, "Essays on Dynamic Pricing" (2013). Arts & Sciences Electronic Theses and Dissertations. 1046.