UCL School of Management

Research seminar

Joonhwi Joo, Chicago

Date

Thursday, 26 October 2017
15:30 – 17:00
Location
Description

UCL School of Management is delighted to welcome Joonhwi Joo, Chicago, to host a research seminar discussing ‘Buying a larger package with quantity surcharge: Information friction or preference heterogeneity?’

Abstract

Sales of larger packages with quantity surcharges occur often in the consumer packaged goods industry. This phenomenon poses a challenge to rationalizing consumer behaviors because the same amount of an identical product can be bought at a cheaper price. I present evidence that consumers lose a considerable amount of money by purchasing quantity surcharged larger packages. I develop and estimate a structural econometric model that combines (i) rationally inattentive consumers with (ii) the address model of consumer demand in the product characteristics space. By simulating consumer demand using model parameter estimates, I decompose the contribution of information friction and preference heterogeneity over package sizes on sales of larger packages with quantity surcharges. The estimated model predicts that only 40% of sales of larger packages with quantity surcharges can be attributed to information friction. I suggest revenue-improving, nonlinear pricing schemes that preserve consumer welfare at the current level. Under the pricing schemes, retailers can raise their revenues by up to 18%, and the corresponding sales of larger packages with quantity surcharge triples. As a methodological contribution, I state and prove the theorem that allows estimating the Rational Inattention (RI) model as if estimating an augmented logit model. 

Open to
PhD Programme
Staff
Cost
Free
Last updated Wednesday, 18 October 2017