Modeling the Distribution of Price Sensitivity and Implications for Optimal Retail Pricing

Abstract

This article focuses on the distribution of price sensitivity across consumers. We employ a random-coefficient logit model in which brand-specific intercepts and price-slope coefficients are allowed to vary across households. The model is estimated with panel data for two product categories. The implications of the estimated model are deduced through an optimal retail pricing analysis that combines the panel data with chain-level cost figures. We test parametric distributional assumptions using semiparametric density estimates based on series expansions.

KEY WORDS:

• Heterogeneity
• Optimal pricing
• Random-coefficient logit