Empirical implications of unobserved household heterogeneity for manufacturer and retailer pricing

This paper investigates manufacturer and retailer pricing decisions for brands within a given product category. We use household-level data and a nested logit model of purchase incidence and brand choice to specify and estimate the demand functions for brands. Our focus is on studying the effect of unobserved household heterogeneity on brand prices. The channel structure assumed is that of several competing manufacturers selling through a single retailer. Manufacturers set wholesale prices to maximize brand profits and the retailer sets selling prices for brands that maximize category profits. Empirical results indicate that accounting for heterogeneity directly influences the level of prices charged by the manufacturers and the retailer.

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