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Empirical properties of diversion ratios

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  • Christopher Conlon
  • Julie Holland Mortimer

Abstract

The diversion ratio for products j and k is the fraction of consumers who leave product j after a price increase and switch to product k. Theoretically, it is expressed as the ratio of demand derivatives from a multi‐product firm's Bertrand‐Nash first‐order condition. In practice, diversion ratios are also measured from second‐choice data or customer‐switching surveys. We establish a LATE interpretation of diversion ratios, and show how diversion ratios are obtained from different interventions (price, quality, or assortment changes) and how those measures relate to one another and to underlying properties of demand.

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  • Christopher Conlon & Julie Holland Mortimer, 2021. "Empirical properties of diversion ratios," RAND Journal of Economics, RAND Corporation, vol. 52(4), pages 693-726, December.
    • Handle: RePEc:bla:randje:v:52:y:2021:i:4:p:693-726
    DOI: 10.1111/1756-2171.12388
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    15. Gayle, Philip & Harrison, Teresa, 2023. "Competition and Strategic Responses to Fundraising in Donative Markets," School of Economics Working Paper Series 2024-9, LeBow College of Business, Drexel University, revised 01 Aug 2024.
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    19. Franz Hackl & Michael Hölzl-Leitner & Dieter Pennerstorfer, 2021. "How to Measure Product Differentiation," Economics working papers 2021-01, Department of Economics, Johannes Kepler University Linz, Austria.
    20. Lydia Cheung, 2014. "The Upward Pricing Pressure Test and the Sensitivity of the Diversion Ratio," Working Papers 2014-08, Auckland University of Technology, Department of Economics.
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    23. Hill, Nicholas & Wagner, Mathis, 2021. "Heterogeneous effects of consolidation on premiums in Medicare Part D," Journal of Health Economics, Elsevier, vol. 80(C).
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    More about this item

    JEL classification:

    • L00 - Industrial Organization - - General - - - General
    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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