Title page for ETD etd-09092005-143148


Type of Document Dissertation
Author Rojas, Christian Andres
Author's Email Address crojas@vt.edu
URN etd-09092005-143148
Title Demand Estimation with Differentiated Products: An Application to Price Competition in the U.S. Brewing Industry
Degree PhD
Department Economics
Advisory Committee
Advisor Name Title
Peterson, Everett B. Committee Chair
Lutz, Nancy A. Committee Co-Chair
Ashley, Richard A. Committee Member
Eckel, Catherine C. Committee Member
Haller, Hans H. Committee Member
Keywords
  • Bertrand-Nash
  • Excise Tax
  • Price Competition
  • Beer
  • Demand
  • Differentiated Products
  • Distance Metric
  • Advertising
  • Brewing
Date of Defense 2005-09-05
Availability unrestricted
Abstract
A large part of the empirical work on differentiated products markets has focused on

demand estimation and the pricing behavior of firms. These two themes are key inputs

in important applications such as the merging of two firms or the introduction of new

products. The validity of inferences, therefore, depends on accurate demand estimates

and sound assumptions about the pricing behavior of firms. This dissertation makes

a contribution to this literature in two ways. First, it adds to previous techniques of

estimating demand for differentiated products. Second, it extends previous analyses of

pricing behavior to models of price leadership that, while important, have received limited

attention. The investigation focuses on the U.S. brewing industry, where price leadership

appears to be an important type of firm behavior.

The analysis is conducted in two stages. In the first stage, the recent Distance Metric

(DM) method devised by Pinkse, Slade and Brett is used to estimate the demand for 64

brands of beer in 58 major metropolitan areas of the United States. This study adds to

previous applications of the DM method (Pinkse and Slade; Slade 2004) by employing a

demand specification that is more flexible and also by estimating advertising substitution

coefficients for numerous beer brands.

In the second stage, different pricing models are compared and ranked by exploiting

the exogenous change in the federal excise tax of 1991. Demand estimates of the first

stage are used to compute the implied marginal costs for the different models of pricing

behavior prior to the tax increase. Then, the tax increase is added to the these pre-tax

increase marginal costs, and equilibrium prices for all brands are simulated for each model

of pricing behavior. These "predicted" prices are then compared to actual prices for model

assessment.

Results indicate that Bertrand-Nash predicts the pricing behavior of firms more closely

than other models, although Stackelberg leadership yields results that are not substanitally

different from the Bertrand-Nash model. Nevertheless, Bertrand-Nash tends to

under-predict prices of more price-elastic brands and to over-predict prices of less price-

elastic brands. An implication of this result is that Anheuser-Busch could exert more

market power by increasing the price of its highly inelastic brands, especially Budweiser.

Overall, actual price movements as a result of the tax increase tend to be more similar

across brands than predicted by any of the models considered. While this pattern is not

inconsistent with leadership behavior, leadership models considered in this dissertation

do not conform with this pattern.

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