Periodic Reporting for period 2 - PRIDISP (Understanding price dispersion: new structural models of price discrimination and applications)
Période du rapport: 2022-03-01 au 2023-08-31
Structural models of demand and supply in differentiated product markets are widely used for policy evaluation and in antitrust. They typically consider firms set uniform prices and fail to explain price dispersion within products. Yet, it is common that the same good is purchased at different prices and this has major consequences for consumers that standard models cannot analyze. This proposal extends standard models to incorporate price dispersion. These new structural models are used to shed lights on the sources of price dispersion, their importance and evaluate the distributional impacts and profitability of price dispersion on important markets (automobile, grocery items, gasoline and transports).
The first project analyzes price differences across versions of the same products. In differentiated product markets, the same product is often available under different versions, each associated with a different quality level. We extend standard models and assume a consumer chooses a product and the quality level of the product. On the supply side, we model the competition between firms setting price schedules (i.e. price as a function of the product level quality). We develop an estimation method for this model and apply it to the French automobile market.
In Project 2, we analyze two frameworks with third-degree price discrimination and some arbitrage opportunities. The first framework is the European car market which is partially integrated. Despite the free movement of goods, car prices differ across markets. Consumers can arbitrage and buy the car in a foreign country and import it, but it is costly. We develop a new structural model of demand and supply to represent partially integrated new car markets in the European Union. The second framework we consider is the car dealing industry in the presence of e-commerce. Consumers buy more and more often online, and we want to predict how online purchases will modify the automobile industry. The main effect of online purchases is that it limits the ability of car dealers to price discriminate through individualized discounts. However, the online channel reduces the consumer shopping costs of visiting physical car dealers.
In a third project, we examine the welfare impacts of price discrimination based on past purchase history. More precisely, we evaluate how beneficial this price discrimination is for firms and the distributional consequences for consumers. First, we relate profitability and consumer surplus gains and losses to the market characteristics using numerical simulations: competition intensity, preference heterogeneity, frequency of purchase opportunity, product differentiation, etc. Then, we apply this framework to food expenses and predict the consequences of targeted prices for individual expenditures and firms’ profits.
In the fourth project, we are interested in spatial heterogeneity and its consequences for prices and regulations. In the working paper “The Welfare Consequences of Urban Traffic Regulations” (joint with Nicolás Martínez), we develop a novel structural model of transportation mode choice where an individual car trip duration is endogenous and determined by the traffic conditions along the itinerary. Traffic conditions depend on how many individuals decide to drive and their itineraries. Our model accounts for the heterogeneous trip characteristics and value of travel time across individuals and allows the welfare consequences of different hypothetical urban traffic regulations.
In a second subproject, we are interested in estimating local demands for gasoline and diesel in France to quantify the distributional consequences of a rise in fuel costs. We develop a novel estimation method to estimate heterogeneous demand across the territory.
In Project 2, we analyze two frameworks with third-degree price discrimination and some arbitrage opportunities. The first framework is the European car market which is partially integrated. Despite the free movement of goods, car prices differ across markets. Consumers can arbitrage and buy the car in a foreign country and import it, but it is costly. We develop a new structural model of demand and supply to represent partially integrated new car markets in the European Union. The second framework we consider is the car dealing industry in the presence of e-commerce. Consumers buy more and more often online, and we want to predict how online purchases will modify the automobile industry. The main effect of online purchases is that it limits the ability of car dealers to price discriminate through individualized discounts. However, the online channel reduces the consumer shopping costs of visiting physical car dealers.
In a third project, we examine the welfare impacts of price discrimination based on past purchase history. More precisely, we evaluate how beneficial this price discrimination is for firms and the distributional consequences for consumers. First, we relate profitability and consumer surplus gains and losses to the market characteristics using numerical simulations: competition intensity, preference heterogeneity, frequency of purchase opportunity, product differentiation, etc. Then, we apply this framework to food expenses and predict the consequences of targeted prices for individual expenditures and firms’ profits.
In the fourth project, we are interested in spatial heterogeneity and its consequences for prices and regulations. In the working paper “The Welfare Consequences of Urban Traffic Regulations” (joint with Nicolás Martínez), we develop a novel structural model of transportation mode choice where an individual car trip duration is endogenous and determined by the traffic conditions along the itinerary. Traffic conditions depend on how many individuals decide to drive and their itineraries. Our model accounts for the heterogeneous trip characteristics and value of travel time across individuals and allows the welfare consequences of different hypothetical urban traffic regulations.
In a second subproject, we are interested in estimating local demands for gasoline and diesel in France to quantify the distributional consequences of a rise in fuel costs. We develop a novel estimation method to estimate heterogeneous demand across the territory.
The working paper “The Welfare Consequences of Urban Traffic Regulations” develops a novel structural model to predict the effects of urban traffic regulations and apply it to Paris metropolitan area. The methodology developed can be used to analyze other cities since it requires relatively standard data on transportation patterns and traffic. It also provides valuable insights into the welfare effects of traditional policy instruments to reduce traffic. First, we find that standard road tolls and driving restrictions are costly for individuals despite significant speed gains. Furthermore, our results show that the variable tolls are better at traffic reduction than the uniform toll or driving restrictions by targeting long-distance commuters who contribute the most to congestion. In turn, they generate the most inequality because individuals on long-distance trips lack suitable public transport alternatives. Applying personalized tolls can increase welfare gains by 63% and emissions reductions by 27%, compared to the variable toll. More realistic policies – such as car vintage or fuel-based driving restrictions, area-specific or combined variable and fixed tolls, and driving-license auctions – do not perform significantly better than the simple ones. The best ancillary instruments to reduce policy losses appear to be connecting the 28.5% of the population with no access to public transport and improving public transport speed.
We also expect to shed light and get quantitative evaluations of several policy-relevant and societal questions. What are the effects of raising oil prices? Who suffers the most, and how can a regulator mitigate the severe consequences on the most vulnerable population? Do firms that collect information about individual purchases through loyalty programs have the incentive to use this information and price discriminate? What would be the consequences for consumer expenses and firms’ profits? What happens to car prices if consumers can buy online? Who gains the most from this new purchase channel among consumers and firms? What are the consequences of market integration for the effects of national environmental regulations? Finally, we expect to develop new methods to estimate demand and supply and test some assumptions of these structural models.
We also expect to shed light and get quantitative evaluations of several policy-relevant and societal questions. What are the effects of raising oil prices? Who suffers the most, and how can a regulator mitigate the severe consequences on the most vulnerable population? Do firms that collect information about individual purchases through loyalty programs have the incentive to use this information and price discriminate? What would be the consequences for consumer expenses and firms’ profits? What happens to car prices if consumers can buy online? Who gains the most from this new purchase channel among consumers and firms? What are the consequences of market integration for the effects of national environmental regulations? Finally, we expect to develop new methods to estimate demand and supply and test some assumptions of these structural models.