Title

Optimal pricing strategies for a cluster of goods: own- and cross-price effects with correlated tastes

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

2020

Journal or Book Title

Applied Economics

Volume

52

Issue

7

First Page or Article ID Number

742

Last Page

755

DOI

10.1080/00036846.2019.1659502

Abstract

Contingent valuation methods are used to identify observed and unobserved preferences of goods and services. We apply these methods, in the context of multivariate probit analysis, to compute willingness to pay for each product of a cluster of goods conditional on having purchased another offered good of the cluster. We also provide a derivation of compensated cross-price elasticities based on unobservable factors, proving to be convenient in situations where cross-prices are not part of the demand equations. As goods belonging to a cluster typically embed correlated taste, their pricing strategy should consider all offered goods simultaneously rather than individually. Therefore, we solve for the set of optimal prices of a social planner whose objective function weights both the producer’s revenues and the consumer’s joint latent utility. We show an application to collegiate sports events, but these methods can be extended in a straightforward fashion to other goods and services. Supplementary materials for this article are available online.

JEL Classification

C30, C35, C40, D12, D40, D60, Z20

Comments

This is a working paper of an article published as Rosas, Francisco, Santiago Acerenza, and Peter F. Orazem. "Optimal pricing strategies for a cluster of goods: own-and cross-price effects with correlated tastes." Applied Economics 52, no. 7 (2020): 742-755. doi: 10.1080/00036846.2019.1659502. Posted with permission.

Copyright Owner

Informa UK Limited

Language

en

File Format

application/pdf

Published Version

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