Distribution Of Consumer Preferences Research Articles

Optimal Assortment and Pricing Decisions for Vertically Differentiated Products

We consider a joint assortment, inventory, and pricing problem of a retailer selling multiple vertically differentiated products of a single category. Consumers are heterogeneous in their willingness to pay for product quality. But the retailer only knows the distribution of consumer preferences. A consumer observes qualities and prices of products in the assortment and chooses a product that provides her the maximum utility. Further, we consider consumer substitution behavior to be assortment based or, static. Depending upon whether or not the demand is stochastic, we consider two scenarios: risky (demand is stochastic) and riskless (demand is deterministic). We formulate a single-period price-dependent newsvendor problem to determine the optimal stocking quantities and prices along with assortment decisions. Under the risky case, we prove that given an assortment the optimal profit function is a strictly pseudo-concave function of the product prices. We also develop the Increasing Convex Envelope Algorithm, a polynomial-time algorithm (O(nlogn), where n is the number of products) to determine the optimal riskless assortment from a given set of available products. We find that as compared to the riskless scenario, under the risky scenario, the optimal prices increase and the optimal assortment size reduces, in order to reduce the effect of inventory costs arising from random demand. Further, we show that the optimal assortment in the risky case is a subset of the optimal assortment in the riskless case. This leads to a reduction in computational time in many practical cases. Through a numerical study, we show that the optimal assortment and the profit thereof are stable even when demand parameters are erroneously estimated. However, both optimal assortment and profit are highly sensitive to errors in the specification of the quality of the products, suggesting that retailers need to have better knowledge about how consumers perceive and evaluate product quality and product attributes.

Strategic Labeling and Trade of GMOs

The emergence of agricultural biotechnology and the subsequent introduction of genetically modified organisms (GMOs) into the food system have been among the most controversial issues surrounding the increasingly scrutinized agri-food system. They have received considerable attention in the economics literature with the main focus being on the optimal regulatory response to products of biotechnology. This paper builds on the literature on the regulation of products of biotechnology by placing the analysis of labeling decisions in a multi-country context. Specifically, the objective of this study is to examine the effect of the strategic interdependence between countries on their regulatory responses to products of biotechnology. The paper analyzes the strategic effects of national regulatory decisions on labeling of GM products and identifies the determinants of the non-cooperative Nash equilibrium labeling regimes in a small number of producing countries that supply the world market of an agricultural product. Analytical results show that the Nash equilibrium configuration of labeling regimes in countries that have adopted the GM technology depends on (i) the distribution of consumer preferences and the level of consumer aversion to GM products; (ii) the size of the segregation and labeling costs in these countries; (iii) the relative productive efficiency and the cost effectiveness of the GM technology; (iv) the market power of the life science companies; and (v) the strength of intellectual property rights in these countries.

Competitive Positioning in Markets with Nonuniform Preferences

We investigate the nature of competitive equilibrium for brands competing in a multi-attribute product space when consumer preferences for product attributes follow nonuniform distributions. We establish subgame-perfect equilibria in a two-stage game, where firms choose positions in the first stage and prices in the second stage. Two types of entry scenarios are investigated. In the first, the number of brands is given exogenously, and all of them choose positions simultaneously. In the second scenario, firms enter in sequence, and the early entrants can choose strategies to deter the entry of later entrants. We find the equilibria for two, three, and four brands for consumer preferences that follow a beta distribution. Nonuniform distributions result in equilibrium configurations that are substantially different from those obtained for uniform consumer distributions. In the two brands case, for sufficiently concentrated distributions we find asymmetric position equilibria with one firm at the corner of the market and one firm at an interior position. In the case of three brands, for sufficiently concentrated preferences we find symmetric equilibria that do not yield maximal differentiation. We also establish an equilibrium for the case of four competing brands. In addition we characterize entry deterring positioning strategies and examine how they vary with the distribution of consumer preferences.

Bertrand Equilibrium in a Differentiated Duopoly

This paper studies the stability of price competition in a horizontally differentiated duopoly. The firms' demand is derived from a distribution of consumer preferences. This description of the consumer sector is applicable to a large class of differentiated commodity markets, including spatial competition models. We show that there is a (pure) price setting equilibrium when consumer tastes are sufficiently dispersed. Further conditions on the dispersedness of preferences guarantee uniqueness of the equilibrium. In addition, we examine the relation between consumer preferences and the competitiveness and efficiency of the equilibrium outcome. This paper investigates the stability of price competition in a horizontally differentiated duopoly. The duopolists' demand is derived from a distribution of preference characteristics over the population of consumers. We show that competition between the firms results in a (pure) price equilibrium when consumer tastes are sufficiently dispersed. The competitiveness of the equilibrium is closely related to the diversity of consumer types. When the support of the preference distribution shrinks to a single point, the equilibrium approaches the Bertrand outcome of a homogeneous good market. We further show that a sufficient degree of preference dispersion guarantees uniqueness of the equilibrium. Finally, we discuss the firms' incentives for product differentiation from the viewpoint of social efficiency. The attractiveness of Bertrand's (1883) approach to the theory of oligopoly lies in the fact that in his model prices are chosen by economic agents rather than by a fictitious auctioneer. Yet, modelling price competition leads to a number of problems, especially with homogeneous goods. As already Bertrand (1883) observed, in the case of equally efficient firms and constant marginal costs the price setting equilibrium coincides with the competitive outcome. This extreme prediction, that holds even with only two firms, appears paradoxical and economically uninteresting for oligopolistic competition. In the absence of the constant returns to scale assumption, the Bertrand model faces up to a further drawback, namely the problem of nonexistence of equilibrium. This problem was first pointed out by Edgeworth (1925) in his analysis of a capacity constrained oligopoly. In his famous article on the stability of competition, Hotelling (1929) took the view that these problems originate in the abstraction of homogeneous goods. Under this assump

A short method for estimating a distribution of consumer preferences.

A short method for estimating a distribution of consumer preferences.