Intro. Preliminaries Model Counterfact. Summary Complexity, Efficiency, and Fairness in Multi-Product Monopoly Pricing Eugenio J. Miravete 1 Jeff Thurk 2 Katja Seim 3 1 University of Texas at Austin & CEPR 2 University of Notre Dame 3 The Wharton School, University of Pennsylvania June 2, 2015 Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Motivation Approach Goals Outline Motivation Wal-Mart collects 2.5 trillion megabytes of transaction data every hour. Business intelligence allows for very sophisticated pricing and marketing strategies We have enough information to implement the most sophisticated pricing models envisioned by economic theorist in their wildest dreams. Why pricing practices remain relatively simple though? How much is too much price discrimination? Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Motivation Approach Goals Outline Uniform Pricing We use data from Pennsylvania’s monopoly to study implications of pricing behavior for retail systems. Spirits, our subject of interest, are sold in state-run stores located across Pennsylvania. The PLCB uses uniform pricing policies for all products: Each product (wine & spirits) sold at identical price statewide. Each product’s price based on a common mark-up percentage. Uniform pricing is common in movie theaters, grocery store product varieties, nationwide retail chains. Zone pricing is common in the wholesale market for gasoline, convenience store chains, insurance, utilities, and telecommunications. Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Motivation Approach Goals Outline Empirical Approach Estimate a discrete choice model of demand for horizontally differentiated products: BLP demand estimation using prices and sales data for 2005. Estimation links heterogeneous price responses for different products to local demographics and product attributes. Estimation does not impose (supply) profit-maximization equilibrium conditions. Policy evaluations: Optimal uniform markup (1). Product-specific markups (234). Product- and market-specific markups (55,210). Regression analysis of simulated outcome measures (elasticities, compensating variation, profit, etc.) on observable, market-specific, socioeconomic information. Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Motivation Approach Goals Outline Goals of the Paper 1 Evaluate the welfare effects from using a uniform pricing policy across heterogeneous products and markets. How much profit does the PLCB forego relative to optimal monopoly pricing? Provides implicit valuation of seller’s other considerations in pricing alcohol, such as public health concerns, etc. Are the welfare gains/losses due to uniform pricing substantial... ...across products? ...across markets? For 2DPD, gains to complex pricing are frequently small (Chu, Leslie, Sorensen; Rogerson; Wilson.) Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Motivation Approach Goals Outline Goals of the Paper 2 How do profits and welfare of uniform pricing and 3DPD compare to each other? Robinson (1933) first addressed this question, which essentially cannot be addressed outside very restrictive theoretical models. Schmalensee (1981) proves that welfare increases with 3DPD if output increases relative to uniform pricing when demands are independent and monopolists enjoys CRS. Varian (1985) same result with interdependent demands and no IRS. Schwartz (1990) same result for any cost function that depend on total output alone. Mauleg (1983) and Mauleg-Snyder (2006) explore demand shape restrictions to bound relative profits and welfare. Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Motivation Approach Goals Outline Goals of the Paper 3 Identify cross-subsidization induced by the current one-size-fits-all pricing policy. How does demand differ across products and markets? What are the distributional effects of uniform markup policy? Who benefits from and who suffers the consequences from the current uniform markup? How important are these rents? Will Pennsylvanians favor a different pricing policy and/or privatization of the PLCB? Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Motivation Approach Goals Outline Agenda Document Preference Heterogeneity Data and Background: PA Liquor Market Demand Model Estimates Analysis of Alternative Pricing Policies Optimal Uniform Markup Product-specific Pricing Product- and Market-specific Pricing Summary and Conclusions Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Intuition Background Data Basic Intuition & Approach P P P MC H P 0 P 0 L P 0 H +MR L MR 0 q 0 H q H q 0 L q L Q 0 * Q (We estimate demand for 234 products in 484 markets and 20 pricing periods). Profits increase with segmentation; welfare ambiguous & dependent on relative curvature of demands. Overall welfare effects depend on variation of markups across products and spatial 3DPD to account for consumers’ preference heterogeneity. Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Intuition Background Data Preference Heterogeneity 38.4 31.0 30.9 27.8 27.3 26.7 22.2 23.1 18.3 16.1 41.2 38.3 32.4 30.8 30.0 29.4 28.7 29.7 100 100 90 90 22.4 25.7 80 80 27.2 28.5 30.1 32.2 30.9 43.8 Market Share (%) Market Share (%) 40.5 42.7 44.4 37.9 33.0 38.5 70 70 35.8 31.7 29.6 35.3 60 60 22.3 33.3 27.9 50 29.4 50 25.0 24.9 23.5 40 40 20.6 23.5 21.0 19.7 18.0 17.3 19.3 15.5 30 30 13.9 23.5 13.1 11.1 18.6 20.2 20 15.4 20 13.8 13.2 10.8 12.3 9.1 9.5 7.7 9.3 8.2 8.4 8.5 7.2 6.0 6.6 10 10 4.6 5.4 4.6 4.9 5.2 5.5 5.5 5.3 5.3 4.1 3.8 4.4 4.2 3.6 3.6 4.5 2.6 2.7 0 0 0 10 20 30 40 50 60 70 80 90 0 10 20 30 40 50 60 70 (a) Share of Non-white Population (b) Share of College Educated Population Income Income 35.8 30.4 41.1 36.3 32.2 31.0 29.1 27.5 100 100 25.1 33.0 33.3 36.4 40.7 45.5 50.3 52.3 90 90 80 80 46.1 44.0 Market Share (%) 26.3 Market Share (%) 70 39.8 70 74.9 36.2 25.4 31.7 67.0 66.7 26.1 60 60 63.6 59.3 50 50 54.5 26.9 49.7 47.7 40 24.0 40 21.1 20.8 19.7 30 16.3 30 13.5 12.9 20 20 12.8 11.8 7.5 7.4 7.0 7.3 7.7 6.4 10 10 4.9 5.5 5.9 6.1 3.6 4.0 4.7 3.0 0 0 0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70 Whiskey Vodka Rum Expensive Gin Tequila Cheap (c) Share of Population with Income > $50K (d) Share of Population with Income > $50K Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Intuition Background Data Preference Heterogeneity Table 3: Product Choice Sets in Markets with Different Income Levels Bottom Income Decile Top Income Decile Alcohol Type Products Price Share Elasticity Products Price Share Elasticity gin 11.88 11.68 13.38 -1.85 13.64 16.85 8.03 -2.69 rum 23.27 12.51 26.10 -1.98 24.69 12.76 14.13 -2.03 tequila 9.33 20.25 4.05 -3.23 15.18 21.85 6.38 -3.48 vodka 38.88 15.54 27.69 -2.47 48.40 16.61 43.62 -2.64 whiskey 38.03 14.64 33.69 -2.33 48.83 18.12 29.01 -2.89 all products 117.90 14.07 22.03 -2.24 148.80 16.85 25.06 -2.68 Statistics based on markets with average annual income either less than $31,020 (Bottom) or more than $74,400 (Top). “Products” reports average number of products available of each category. Average price and elasticity statistics are sales-weighted. “Share” denotes the share of each liquor category based on total PLCB sales of 750ml bottles while “ all products ” corresponds to the share of total liquor sales in PA. Elasticity statistics based on multinomial logit demand system estimates and a price coefficient of -0.16. Preferences are markedly different across income levels. Affluent consumers purchase more varieties of high quality products priced $3 higher on average. Affluent consumers concentrate their demand on vodka and whiskeys while poorest consumers favor gin and rum. Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Intuition Background Data Variation in Market Demographics Table 5: Demographics Across Stores % of Population Statistic Population Minority Age ≥ 45 Income ≥ 50k Educ ≥ College mean 29,440.9 12.3 10.6 39.2 24.4 sd 17,708.5 18.0 3.7 12.7 13.8 max 111,964.0 98.9 33.4 72.0 72.7 min 2,574.0 0.2 5.2 9.4 3.0 Substantial variation in income, as well as other demographics, across the state of Pennsylvania. Combined with relationship between tastes and demographics, suggests that a uniform pricing rule should affect different consumers differently. Miravete, Thurk, Seim Alcohol Pricing
Intro. Preliminaries Model Counterfact. Summary Intuition Background Data Background: PLCB Operations Pennsylvania holds state monopoly for wine & spirits wholesale and retail. Motivations for public enterprise: Significant source of tax revenue. “Sell liquor responsibly”. Potentially significant monopsony power. Store network: 624 stores across Pennsylvania as of 1/2005. Majority stand-alone retail stores. 7 outlet stores; 65 “premium” stores. Miravete, Thurk, Seim Alcohol Pricing
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