Browsing by Subject "Zone Pricing"

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    Essays in industrial organization
    (2014-06) Williams, Kevin R.
    This dissertation is comprised of two essays, both of which study how particular market environments affect firms' abilities to price discriminate.In the first chapter, I analyze the pricing decisions of airlines in monopoly markets. Airline markets are noted for having several key features: (1) airlines have limited capacity and limited time to sell, (2) airlines face uncertainty in the popularity of any given flight, and (3) consumers who purchase tickets close to the departure date are less price sensitive than those who buy well in advance. These forces influence the pricing decision - what I call dynamic adjustment to stochastic demand (1 and 2) and intertemporal price discrimination (3). While the previous literature has emphasized each force in isolation, in this chapter, I estimate a model of dynamic airline pricing taking both into account. I use an original data set of daily fares and seat availabilities at the flight level. With model estimates, I disentangle key interactions between the arrival pattern of consumer types and remaining capacity under stochastic demand. I find dynamic adjustment to stochastic demand is particularly important as a means to secure seats for high-valuing consumers who arrive close to the departure date. It leads to substantial revenue gains compared to pricing policies which depend on date of purchase but not remaining capacity. In aggregate consumers benefit, despite facing higher fares on average, as a result of more efficient capacity allocation. Finally, I show an empirical procedure abstracting from stochastic demand will systematically understate the price insensitivity of consumers who search for tickets close to the date of travel.In the second chapter, Brian Adams and I develop an empirical analysis of zone pricing under competition. While monopolists can only increase profits by adopting more granular pricing policies, this is not necessarily the case in markets with competition. Using an original data set for the retail drywall industry, we estimate a structural model of supply and demand. We use the model estimates to calculate equilibrium under alternative pricing policies to quantify the welfare implications of zone pricing. We find consumer surplus decreases substantially but firm profits appear to increase with finer pricing. As firms have not adopted these policies, they must face some additional costs. We call these costs "spatial menu costs," and our analysis finds them to be substantial: at least 22.1% of estimated profits, or 2.2% of revenues. Finally, we show that competitive interaction plays an important role in recovering menu costs - failing to account for competitive effects leads to an overestimate of profit gains and implied menu costs by 32.9%.