Demand and pricing in the breakfast cereals industry

Heterogeneity in price sensitivity: Implications for price discrimination. This essay uses a random-coefficients framework to investigate the degree of heterogeneity in household responsiveness to breakfast cereal prices, and to what degree this heterogeneity in price response can be predicted using observables. These results have implications for how firms may benefit from perfect price discrimination based on new access to either household demographics or household purchase histories. The empirical model is estimated on a household panel of 15,000 breakfast cereal purchases by 3,114 households in 1991. The model assumes each individual in a household faces a discrete choice among brands, where a price responsiveness parameter in the utility function is expressed as the sum of an observable and a latent component. Results show that price responsiveness can be predicted to a substantial degree, though not fully, using observables.;Oligopoly pricing with a test for collusion. A structural model of static firm pricing is employed to test for evidence of collusive pricing arrangements among manufacturers for the period 1991-1993. This essay extends the discrete-choice demand model developed in the previous chapter, using 80,567 purchase decisions by 4682 households. The demand estimates are combined with a model of firm pricing behavior to compute product-level markups and marginal cost under several alternative assumptions of collusive pricing behavior. Separate estimates of underlying marginal cost parameters are obtained from each set of marginal costs, and specification tests are used to evaluate which measure of marginal cost best fits the data. The results provide no statistical evidence in support of collusive behavior in prices during the period under consideration.