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Optimal pricing strategies for a cluster of goods: own- and cross-price effects with correlated tastes

Author

Listed:
  • Rosas, Francisco
  • Acerenza, Santiago
  • Orazem, Peter F.
Abstract
Contingent valuation methods are used to identify observed and unobserved preferences of goods and services. We apply these methods, in the context of multivariate probit analysis, to compute willingness to pay for each product of a cluster of goods conditional on having purchased another offered good of the cluster. We also provide a derivation of compensated cross-price elasticities based on unobservable factors, proving to be convenient in situations where cross-prices are not part of the demand equations. As goods belonging to a cluster typically embed correlated taste, their pricing strategy should consider all offered goods simultaneously rather than individually. Therefore, we solve for the set of optimal prices of a social planner whose objective function weights both the producer’s revenues and the consumer’s joint latent utility. We show an application to collegiate sports events, but these methods can be extended in a straightforward fashion to other goods and services. Supplementary materials for this article are available online.

Suggested Citation

  • Rosas, Francisco & Acerenza, Santiago & Orazem, Peter F., 2020. "Optimal pricing strategies for a cluster of goods: own- and cross-price effects with correlated tastes," ISU General Staff Papers 202001010800001008, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:202001010800001008
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    More about this item

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General
    • Z20 - Other Special Topics - - Sports Economics - - - General

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