Essays on Dynamic Pricing

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\u27 efforts by taking a lion\u27s share of the additional profits that accrue to the channel from the existence of inertial demand

Modeling Emerging-Market Firms’ Competitive Retail Distribution Strategies

In emerging markets, the effective implementation of distribution strategies is challenged by underdeveloped road infrastructure and a low penetration of retail stores that are insufficient in meeting customer needs. In addition, products are typically distributed in multiple forms through multiple retail channels. Given the competitive landscape, manufacturers’ distribution strategies should be based on anticipation of competitor reactions. Accordingly, the authors develop a manufacturer-level competition model to study the distribution and price decisions of insecticide manufacturers competing across multiple product forms and retail channels. Their study shows that both consumer preferences and estimated production and distribution costs vary across brands, product forms, and retail channels; that ignoring distribution and solely focusing on price competition results in up to a 55% overestimation of manufacturer profit margins; and that observed pricing and distribution patterns support competition rather than collusion among manufacturers. Through counterfactual studies, the authors find that manufacturers respond to decreases in distribution costs and to the exclusive distribution of more preferred manufacturers by asymmetrically changing their price and distribution decisions across different retail channels