IDEAS home Printed from https://ideas.repec.org/p/zwi/fpcrep/115.html
   My bibliography  Save this paper

Variety: Consumer Choice and Optimal Diversity

Author

Listed:
  • William C. Horrace

    (Syracuse University)

  • Rui Huang

    (University of Connecticut)

  • Jeffrey M. Perloff

    (University of California, Berkeley)

Abstract

Consumers choose from among the varieties of two brands and an outside good using order statistics. We analytically derive demand functions conditional on their valuations of the varieties being distributed independently uniform. Based on this theory, we estimate a threeparameter empirical version of the model for the soft-drink market. These estimates are used to determine the effects of changes in the number of varieties on demand curves and consumer welfare. We use our estimates to compare the profit-maximizing number of varieties within a grocery store to the socially optimal number and find that consumer surplus and welfare would increase with more variety.

Suggested Citation

  • William C. Horrace & Rui Huang & Jeffrey M. Perloff, 2009. "Variety: Consumer Choice and Optimal Diversity," Food Marketing Policy Center Research Reports 115, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    • Handle: RePEc:zwi:fpcrep:115
    as

    Download full text from publisher

    File URL: http://fmpc.uconn.edu/publications/rr/rr115.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Golan, Amos & Karp, Larry S. & Perloff, Jeffrey M., 1998. "Estimating Coke and Pepsi's Price and Advertising Strategies," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt18b1q4kr, Department of Agricultural & Resource Economics, UC Berkeley.
    2. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 43(2), pages 217-235.
    3. Perloff, Jeffrey M & Salop, Steven, 1984. "Equilibrium with product differentiation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt4cq0m6s3, Department of Agricultural & Resource Economics, UC Berkeley.
    4. Gilbert, Richard J & Matutes, Carmen, 1993. "Product Line Rivalry with Brand Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 41(3), pages 223-240, September.
    5. Golan, Amos & Karp, Larry & Perloff, Jeffrey M., 1999. "Estimating Coke and Pepsi's price and advertising strategies," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt6rf8j6m4, Department of Agricultural & Resource Economics, UC Berkeley.
    6. Tat Y. Chan, 2006. "Estimating a continuous hedonic‐choice model with an application to demand for soft drinks," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 466-482, June.
    7. J. Miguel Villas-Boas, 2004. "Communication Strategies and Product Line Design," Marketing Science, INFORMS, vol. 23(3), pages 304-316, January.
    8. Brander, James A & Eaton, Jonathan, 1984. "Product Line Rivalry," American Economic Review, American Economic Association, vol. 74(3), pages 323-334, June.
    9. Jerry A. Hausman, 1996. "Valuation of New Goods under Perfect and Imperfect Competition," NBER Chapters, in: The Economics of New Goods, pages 207-248, National Bureau of Economic Research, Inc.
    10. Jeffrey M. Perloff & Steven C. Salop, 1985. "Equilibrium with Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(1), pages 107-120.
    11. Aviv Nevo, 2003. "New Products, Quality Changes, and Welfare Measures Computed from Estimated Demand Systems," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 266-275, May.
    12. Barry L. Bayus & William P. Putsis, Jr., 1999. "Product Proliferation: An Empirical Analysis of Product Line Determinants and Market Outcomes," Marketing Science, INFORMS, vol. 18(2), pages 137-153.
    13. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    14. Guillermo Israilevich, 2004. "Assessing Supermarket Product-Line Decisions: The Impact of Slotting Fees," Quantitative Marketing and Economics (QME), Springer, vol. 2(2), pages 141-167, June.
    15. Golan, Amos & Karp, Larry S & Perloff, Jeffrey M, 2000. "Estimating Coke's and Pepsi's Price and Advertising Strategies," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(4), pages 398-409, October.
    16. Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1.
    17. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    18. Raubitschek, Ruth S, 1987. "A Model of Product Proliferation with Multiproduct Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 35(3), pages 269-279, March.
    19. Raymond Deneckere & Michael Rothschild, 1992. "Monopolistic Competition and Preference Diversity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(2), pages 361-373.
    20. Klemperer, Paul, 1992. "Equilibrium Product Lines: Competing Head-to-Head May Be Less Competitive," American Economic Review, American Economic Association, vol. 82(4), pages 740-755, September.
    21. Michaela Draganska & Dipak C. Jain, 2005. "Product‐Line Length as a Competitive Tool," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 1-28, March.
    22. Tat Y. Chan, 2006. "Estimating a Continuous Hedonic-Choice Model with an Application to Demand for Soft Drinks," RAND Journal of Economics, The RAND Corporation, vol. 37(2), pages 466-482, Summer.
    23. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    24. Gasmi, F & Laffont, J J & Vuong, Q, 1992. "Econometric Analysis of Collusive Behavior in a Soft-Drink Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 277-311, Summer.
    25. Tirtha Dhar & Jean‐Paul Chavas & Ronald W. Cotterill & Brian W. Gould, 2005. "An Econometric Analysis of Brand‐Level Strategic Pricing Between Coca‐Cola Company and PepsiCo," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(4), pages 905-931, December.
    26. Nijssen, Edwin J & Van Trijp, Hans C M, 1998. "Branding Fresh Food Products: Exploratory Empirical Evidence from the Netherlands," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 25(2), pages 228-242.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Horrace, William C. & Huang, Rui & Perloff, Jeffrey M., 2016. "Effects of increased variety on demand, pricing, and welfare," Research in Economics, Elsevier, vol. 70(4), pages 569-587.
    2. Anderson, Simon P. & de Palma, Andre, 2000. "From local to global competition," European Economic Review, Elsevier, vol. 44(3), pages 423-448, March.
    3. Steven Berry & Amit Gandhi & Philip Haile, 2013. "Connected Substitutes and Invertibility of Demand," Econometrica, Econometric Society, vol. 81(5), pages 2087-2111, September.
    4. Mojduszka, Eliza M., 2001. "Integration Of A Product Choice Model And A Latent Variable Model Of Nutrition Information," 2001 Annual meeting, August 5-8, Chicago, IL 20678, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Sällström, Susanna, 2009. "Functional Differentiation," CEPR Discussion Papers 7187, C.E.P.R. Discussion Papers.
    6. Eliza M. Mojduszka & Julie A. Caswell & J. Michael Harris, 2001. "Consumer choice of food products and the implications for price competition and government policy," Agribusiness, John Wiley & Sons, Ltd., vol. 17(1), pages 81-104.
    7. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
    8. Stiglitz, Joseph E., 2017. "Monopolistic competition, the Dixit–Stiglitz model, and economic analysis," Research in Economics, Elsevier, vol. 71(4), pages 798-802.
    9. Barry L. Bayus & William P. Putsis, Jr., 1999. "Product Proliferation: An Empirical Analysis of Product Line Determinants and Market Outcomes," Marketing Science, INFORMS, vol. 18(2), pages 137-153.
    10. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    11. Mojduszka, Eliza M. & Everett, Rachel M. & Nemana, Aparna, 2005. "Exogenous vs. Endogenous Consumer Preferences and Knowledge about Nutrition," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24630, European Association of Agricultural Economists.
    12. Richards, Timothy J. & Hamilton, Stephen F. & Patterson, Paul M., 2010. "Spatial Competition and Private Labels," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(2), pages 1-26, August.
    13. Etro, Federico, 2017. "Research in economics and monopolistic competition," Research in Economics, Elsevier, vol. 71(4), pages 645-649.
    14. Shinn‐Shyr Wang & Kyle W. Stiegert & Tirtha P. Dhar, 2010. "Strategic Pricing Behavior under Asset Value Maximization," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 58(2), pages 151-170, June.
    15. Creane, Anthony & Manduchi, Agostino, 2022. "Informative advertising in monopolistically competitive markets," International Journal of Industrial Organization, Elsevier, vol. 83(C).
    16. Heritiana Ranaivoson, 2005. "The economic analysis of product diversity," Cahiers de la Maison des Sciences Economiques r05083, Université Panthéon-Sorbonne (Paris 1).
    17. Heritiana Ranaivoson, 2005. "The economic analysis of product diversity," Post-Print halshs-00197137, HAL.
    18. Alessandro Bonanno & Carlo Russo & Luisa Menapace, 2018. "Market power and bargaining in agrifood markets: A review of emerging topics and tools," Agribusiness, John Wiley & Sons, Ltd., vol. 34(1), pages 6-23, December.
    19. Clarissa Yeap, 2006. "The Production Decisions of Large Competitors: Detecting Cost Advantages and Strategic Behavior in Restaurants," Working Papers 06-19, Center for Economic Studies, U.S. Census Bureau.
    20. Nilsson, Tomas K.H. & Foster, Kenneth A., 2005. "Certification of Pork Products," 2005 Annual meeting, July 24-27, Providence, RI 19350, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zwi:fpcrep:115. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/dauctus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.