Type of Document Dissertation Author Rojas, Christian Andres Author's Email Address firstname.lastname@example.org 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
- Excise Tax
- Price Competition
- Differentiated Products
- Distance Metric
Date of Defense 2005-09-05 Availability unrestricted AbstractA 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
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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