Nonlinear Pricing in an Oligopoly Market: the Case of Specialty Coffee (2003)
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BibTeX
@TECHREPORT{McManus03nonlinearpricing,
author = {Brian McManus},
title = { Nonlinear Pricing in an Oligopoly Market: the Case of Specialty Coffee},
institution = {},
year = {2003}
}
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Abstract
Firms that practice second-degree price discrimination may intentionally distort product characteristics away from their efficient levels (e.g., the small version of a product is “too small.”) This paper offers the first empirical study of this product design issue. Using data from a specialty coffee market, I estimate a structural utility model that allows for consumer screening under vertical preference heterogeneity. Comparisons of cost data and the estimated benefits from changing product characteristics suggest that some of the central predictions of nonlinear pricing theory are realized in the observed market. Product design distortions are relatively large for drinks that are not the most pro…table but over which the firms hold market power. The estimated distortions decrease toward zero for the products with the highest price-cost margins; this result provides empirical support for the “no distortion at the top” prediction from theory.
