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An Empirical Study of National vs. Local Pricing under Multimarket Competition

Yang Li, 2012
Faculty Advisor: Brett Gordon

Abstract

Geographic price discrimination is generally considered beneficial to firm profitability. Firms can extract higher rents by varying prices across markets to match consumers' preferences. This paper empirically demonstrates, however, that a firm may instead prefer a national pricing policy that fixes prices across geographic markets, foregoing the opportunity to customize prices. Under appropriate conditions, a national pricing policy helps avoid intense local competition due to targeted prices. I examine the choice of national versus local pricing under multimarket retail chain competition using extensive data from the digital camera market. I estimate a highly flexible model of aggregate demand that incorporates additional micro purchase moments and semi-parametric heterogeneity. Counterfactual analyses show the major retail firms should employ a national pricing policy to maximize profits, rather than target prices in each local market. Fixing prices across markets allows the retailers to soften otherwise intense local competition by subsidizing competitive markets with profits from less competitive markets. Additional results explore how market factors could affect the pricing policy decision and assist retail managers in choosing their geographic pricing policies.

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