Category Pricing with State-Dependent Utility

There is substantial literature documenting the presence of state-dependent utility with packaged goods data. Typically, a form of brand loyalty is detected whereby there is a higher probability of purchasing the same brand as has been purchased in the recent past. The economic significance of the m...

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Bibliographic Details
Published inMarketing science (Providence, R.I.) Vol. 27; no. 3; pp. 417 - 429
Main Authors Dube, Jean-Pierre, Hitsch, Gunter J, Rossi, Peter E, Vitorino, Maria Ana
Format Journal Article
LanguageEnglish
Published Linthicum INFORMS 01.05.2008
Institute for Operations Research and the Management Sciences (INFORMS)
Institute for Operations Research and the Management Sciences
SeriesMarketing Science
Subjects
Analysis
Approximation
Brand loyalty
Brands
Business
Category management
Consumer behavior
Consumer behaviour
consumer heterogeneity
Consumer preferences
Consumers
Corporate planning
Customers
dynamic pricing
Dynamic programming
Euler equations
Households
Loyalty
Margarine
Market prices
Marketing
Orange juice
Packaged goods
Prices
Pricing
Pricing policies
Profits
Retail stores
state dependence
State vectors
Studies
United States
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Summary:There is substantial literature documenting the presence of state-dependent utility with packaged goods data. Typically, a form of brand loyalty is detected whereby there is a higher probability of purchasing the same brand as has been purchased in the recent past. The economic significance of the measured loyalty remains an open question. We consider the category pricing problem and demonstrate that the presence of loyalty materially affects optimal pricing. The prices of higher quality products decline relative to those of lower quality when loyalty is introduced into the model. Given the well-known problems with the confounding of state dependence and consumer heterogeneity, loyalty must be measured in a model which allows for an unknown and possibly highly nonnormal distribution of heterogeneity. We implement a highly flexible model of heterogeneity using multivariate mixtures of normals in a hierarchical choice model. We use an Euler equations approach to the solution of the dynamic pricing problem which allows us to consider a very large number of consumer types.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0732-2399
1526-548X
DOI:10.1287/mksc.1070.0305