One of the most frequently cited articles in the economics literature of this millennium is that on platform competition in two-sided markets by Rochet and Tirole (2003). Yet it is probably also among the least understood. I have several reasons to think so. One is that the two-sided market model of the article is introduced using a highly confusing language and leaving many underlying assumptions unstated. Another is that the text is littered with mathematical formulae with scant explanation of why they are there, and even with mistakes in them. But the most important reason is that the model does not fit the story told around it, and pretends to have a much broader scope than it actually has. In this paper, I spell out the key assumptions and rephrase the model in a more transparent way, so as to unveil what it really stands for. Be prepared for some disappointment!
{"title":"Deciphering the Two-Sided Market Model of Rochet and Tirole: An Intricate Undertaking","authors":"Adriaan ten Kate","doi":"10.2139/ssrn.3894541","DOIUrl":"https://doi.org/10.2139/ssrn.3894541","url":null,"abstract":"One of the most frequently cited articles in the economics literature of this millennium is that on platform competition in two-sided markets by Rochet and Tirole (2003). Yet it is probably also among the least understood. I have several reasons to think so. One is that the two-sided market model of the article is introduced using a highly confusing language and leaving many underlying assumptions unstated. Another is that the text is littered with mathematical formulae with scant explanation of why they are there, and even with mistakes in them. But the most important reason is that the model does not fit the story told around it, and pretends to have a much broader scope than it actually has. In this paper, I spell out the key assumptions and rephrase the model in a more transparent way, so as to unveil what it really stands for. Be prepared for some disappointment!","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"85 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132462687","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I study the effects of allowing futures contracts on an asset in a dynamic market when competition is imperfect. I first show that imperfect competition creates a market incompleteness: by delaying trade to mitigate price impact in the spot market, buyers (sellers) face the risk that the price unexpectedly increases (decreases) due to a supply shock. Futures with maturity shorter than traders' horizon would allow them to share this risk. Second, I show that once futures are introduced, traders want to manipulate their payoff: long futures want to buy the asset at maturity to raise the spot price, and conversely for shorts. In equilibrium, traders choose negative hedge ratios because of manipulation: spot sellers (buyers) buy (sell) forward, and reduce their positions when volatility is higher. Unless manipulation is impeded, traders traders are better off without futures. Third, because of imperfect competition, the spot price can be below or above the futures price, depending on supply shock expectation: an arbitrage opportunity arises without market segmentation.
{"title":"Strategic Trading, Welfare and Prices with Futures Contracts","authors":"Hugues Dastarac","doi":"10.2139/ssrn.3488037","DOIUrl":"https://doi.org/10.2139/ssrn.3488037","url":null,"abstract":"I study the effects of allowing futures contracts on an asset in a dynamic market when competition is imperfect. I first show that imperfect competition creates a market incompleteness: by delaying trade to mitigate price impact in the spot market, buyers (sellers) face the risk that the price unexpectedly increases (decreases) due to a supply shock. Futures with maturity shorter than traders' horizon would allow them to share this risk. Second, I show that once futures are introduced, traders want to manipulate their payoff: long futures want to buy the asset at maturity to raise the spot price, and conversely for shorts. In equilibrium, traders choose negative hedge ratios because of manipulation: spot sellers (buyers) buy (sell) forward, and reduce their positions when volatility is higher. Unless manipulation is impeded, traders traders are better off without futures. Third, because of imperfect competition, the spot price can be below or above the futures price, depending on supply shock expectation: an arbitrage opportunity arises without market segmentation.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125131341","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Airfares fluctuate due to demand shocks and intertemporal variation in willingness to pay. I estimate a model of dynamic airline pricing accounting for both sources of price adjustments using flight‐level data. I use the model estimates to evaluate the welfare effects of dynamic airline pricing. Relative to uniform pricing, dynamic pricing benefits early‐arriving, leisure consumers at the expense of late‐arriving, business travelers. Although dynamic pricing ensures seat availability for business travelers, these consumers are then charged higher prices. When aggregated over markets, welfare is higher under dynamic pricing than under uniform pricing. The direction of the welfare effect at the market level depends on whether dynamic price adjustments are mainly driven by demand shocks or by changes in the overall demand elasticity.
{"title":"The Welfare Effects of Dynamic Pricing: Evidence from Airline Markets","authors":"Kevin R. Williams","doi":"10.2139/ssrn.3026383","DOIUrl":"https://doi.org/10.2139/ssrn.3026383","url":null,"abstract":"Airfares fluctuate due to demand shocks and intertemporal variation in willingness to pay. I estimate a model of dynamic airline pricing accounting for both sources of price adjustments using flight‐level data. I use the model estimates to evaluate the welfare effects of dynamic airline pricing. Relative to uniform pricing, dynamic pricing benefits early‐arriving, leisure consumers at the expense of late‐arriving, business travelers. Although dynamic pricing ensures seat availability for business travelers, these consumers are then charged higher prices. When aggregated over markets, welfare is higher under dynamic pricing than under uniform pricing. The direction of the welfare effect at the market level depends on whether dynamic price adjustments are mainly driven by demand shocks or by changes in the overall demand elasticity.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129736943","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
K. Berger, Christina Schamp, Mark Heitmann, K. Wertenbroch
In service marketing, customers typically pay more when they use more. Based on this principle, various non-linear pricing plans or flat-rate tariffs attempt to lure customers into higher use and higher-revenue contracts. An emerging marketing practice we term precommitment-based pricing turns these principles around and asks customers to pay extra when they use the service too little. For example, a local fitness club offers customers a discount when they reach a minimum training frequency, and those who fall short pay a premium. This form of pricing aligns directly with customer objectives and assists them in achieving their goals. In this research, we assess which type of precommitment-based pricing is best suited to pay off for marketers and customers alike. We study whether refunds for high use (prepaid) or premium payments for low use (postpaid) are more effective and find empirically that these different types of payment have a differential impact on service adoption, goal attainment, and retention. Five empirical studies in three service domains demonstrate that prepaid contracts attract more customers, but postpaid contracts increase goal achievement and, thus, loyalty. We test boundary conditions and discuss practical implications on how to implement precommitment-based pricing.
{"title":"Precommitment-based Pricing","authors":"K. Berger, Christina Schamp, Mark Heitmann, K. Wertenbroch","doi":"10.2139/ssrn.3872571","DOIUrl":"https://doi.org/10.2139/ssrn.3872571","url":null,"abstract":"In service marketing, customers typically pay more when they use more. Based on this principle, various non-linear pricing plans or flat-rate tariffs attempt to lure customers into higher use and higher-revenue contracts. An emerging marketing practice we term precommitment-based pricing turns these principles around and asks customers to pay extra when they use the service too little. For example, a local fitness club offers customers a discount when they reach a minimum training frequency, and those who fall short pay a premium. This form of pricing aligns directly with customer objectives and assists them in achieving their goals. In this research, we assess which type of precommitment-based pricing is best suited to pay off for marketers and customers alike. We study whether refunds for high use (prepaid) or premium payments for low use (postpaid) are more effective and find empirically that these different types of payment have a differential impact on service adoption, goal attainment, and retention. Five empirical studies in three service domains demonstrate that prepaid contracts attract more customers, but postpaid contracts increase goal achievement and, thus, loyalty. We test boundary conditions and discuss practical implications on how to implement precommitment-based pricing.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123752252","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We propose a scientific, game-theoretic model in which a monopolist sells a fashion product in a market consisting of strategic consumers. Research papers on this subject have studied the adverse consequences of strategic consumer behavior, and have proposed a variety of mechanisms to counteract this phenomenon. In this work, we introduce a very broad class of mechanisms which we refer to as early-purchase reward (EPR) programs. Such class includes, but is not limited to strategies such as price-matching, price commitment, and capacity rationing. Confining ourselves to a simple but tractable model, we are able to obtain a complete analytical characterization of the optimal EPR program that a seller should offer to its consumers. Such a program maintains a structure that consists of two components: (1) a promised refund ("participation bonus") that segments the market over the course of the season, and (2) a "modified price matching guarantee" that serves as a lever to counteract strategic consumer behavior. The latter component protects consumers against price drops, but charges them for the fact that they get to enjoy the product by consuming it earlier rather than later in the season. We find that optimal EPR programs are particularly valuable when the inventory and the degree of fashion are high. We have also conducted a numerical analysis to further compare an EPR program (heuristic) to an optimal price-matching strategy, in a rich modelling framework that consists of market size uncertainty, production costs, mixture of strategic and non-strategic consumers, and more. Our results suggest that EPR programs can be advantageous in settings involving modest-to-high degrees of fashion and high degrees of market size uncertainty, regardless of the percentage of strategic consumers in the market.
{"title":"Innovative Dynamic Pricing: The Potential Benefits of Early-Purchase Reward Programs","authors":"Yossi Aviv, Mike Mingcheng Wei","doi":"10.2139/ssrn.3150572","DOIUrl":"https://doi.org/10.2139/ssrn.3150572","url":null,"abstract":"We propose a scientific, game-theoretic model in which a monopolist sells a fashion product in a market consisting of strategic consumers. Research papers on this subject have studied the adverse consequences of strategic consumer behavior, and have proposed a variety of mechanisms to counteract this phenomenon. In this work, we introduce a very broad class of mechanisms which we refer to as early-purchase reward (EPR) programs. Such class includes, but is not limited to strategies such as price-matching, price commitment, and capacity rationing. Confining ourselves to a simple but tractable model, we are able to obtain a complete analytical characterization of the optimal EPR program that a seller should offer to its consumers. Such a program maintains a structure that consists of two components: (1) a promised refund (\"participation bonus\") that segments the market over the course of the season, and (2) a \"modified price matching guarantee\" that serves as a lever to counteract strategic consumer behavior. The latter component protects consumers against price drops, but charges them for the fact that they get to enjoy the product by consuming it earlier rather than later in the season. We find that optimal EPR programs are particularly valuable when the inventory and the degree of fashion are high. We have also conducted a numerical analysis to further compare an EPR program (heuristic) to an optimal price-matching strategy, in a rich modelling framework that consists of market size uncertainty, production costs, mixture of strategic and non-strategic consumers, and more. Our results suggest that EPR programs can be advantageous in settings involving modest-to-high degrees of fashion and high degrees of market size uncertainty, regardless of the percentage of strategic consumers in the market.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130571483","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We consider the time interval Δ during which the market trade time-series are averaged as the key factor of the consumption-based asset-pricing model that causes modification of the basic pricing equation. The duration of Δ determines Taylor series of investor’s utility over current and future values of consumption. We present consumption at current and future moments as sums of their mean values and perturbations during Δ of the price at current moment t and perturbations of the payoff at day t+1. For linear and quadratic Taylor series approximations of the basic equation we obtain new relations on mean price, mean payoff, their volatilities, skewness and amount of asset ξmax that delivers max to investor’s utility. The stochasticity of market trade time-series defines random properties of the asset price time-series during Δ. We introduce new market-based price probability measure entirely determined by frequency-based probability measures of the market trade value and volume. The conventional frequency-based price probability is a very special case of the market-based price probability measure when all trade volumes during Δ equal unit. Prediction of the market-based price probability at horizon T equals forecast of the market trade value and volume probabilities at same horizon. The similar Taylor series and probability measures alike to market-based price probability can be used as approximations of different versions of asset pricing, financial and economic models that describe relations between economic and financial variables averaged during some time interval Δ.
{"title":"Three Remarks On Asset Pricing","authors":"Victor Olkhov","doi":"10.2139/ssrn.3852261","DOIUrl":"https://doi.org/10.2139/ssrn.3852261","url":null,"abstract":"We consider the time interval Δ during which the market trade time-series are averaged as the key factor of the consumption-based asset-pricing model that causes modification of the basic pricing equation. The duration of Δ determines Taylor series of investor’s utility over current and future values of consumption. We present consumption at current and future moments as sums of their mean values and perturbations during Δ of the price at current moment t and perturbations of the payoff at day t+1. For linear and quadratic Taylor series approximations of the basic equation we obtain new relations on mean price, mean payoff, their volatilities, skewness and amount of asset ξmax that delivers max to investor’s utility. The stochasticity of market trade time-series defines random properties of the asset price time-series during Δ. We introduce new market-based price probability measure entirely determined by frequency-based probability measures of the market trade value and volume. The conventional frequency-based price probability is a very special case of the market-based price probability measure when all trade volumes during Δ equal unit. Prediction of the market-based price probability at horizon T equals forecast of the market trade value and volume probabilities at same horizon. The similar Taylor series and probability measures alike to market-based price probability can be used as approximations of different versions of asset pricing, financial and economic models that describe relations between economic and financial variables averaged during some time interval Δ.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"75 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-05-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134022669","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Recent empirical researches documented that there exists nonlinear pricing phenomenon in the shipping industry. This paper strives to show how this empirical regularity would alter conventional results in trade literature. This paper shows that when nonlinear pricing in shipping industry is considered, while the average productivity is higher conducive to higher welfare level, the gains from trade is generally lower than the situation without. In addition, the model built in this paper offers micro foundations for additive trade cost and features endogenous response of shipping charges to iceberg trade cost, an empirical finding emphasized in Hummels et al. (2009). In a much broader sense, this paper argues that heterogeneous firm model offers a lens through which traditional results on some interesting objects, e.g. gains from trade, could be altered.
近年来的实证研究表明，航运业存在非线性定价现象。本文力求展示这种经验规律将如何改变贸易文献中的传统结果。本文表明，在考虑航运业非线性定价的情况下，虽然平均生产率越高有利于提高福利水平，但贸易收益普遍低于没有非线性定价的情况。此外，本文构建的模型为附加贸易成本提供了微观基础，并具有运费对冰山贸易成本的内生响应，Hummels et al.(2009)强调了这一实证发现。从更广泛的意义上讲，本文认为异质企业模型提供了一个视角，通过这个视角，一些有趣对象(如贸易收益)的传统结果可以被改变。
{"title":"Nonlinear Pricing in the Transport Industry and the Gains from Trade","authors":"Zheng Han, D. Fujii","doi":"10.2139/ssrn.3807170","DOIUrl":"https://doi.org/10.2139/ssrn.3807170","url":null,"abstract":"Recent empirical researches documented that there exists nonlinear pricing phenomenon in the shipping industry. This paper strives to show how this empirical regularity would alter conventional results in trade literature. This paper shows that when nonlinear pricing in shipping industry is considered, while the average productivity is higher conducive to higher welfare level, the gains from trade is generally lower than the situation without. In addition, the model built in this paper offers micro foundations for additive trade cost and features endogenous response of shipping charges to iceberg trade cost, an empirical finding emphasized in Hummels et al. (2009). In a much broader sense, this paper argues that heterogeneous firm model offers a lens through which traditional results on some interesting objects, e.g. gains from trade, could be altered.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"33 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122675271","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
With access to highly-detailed data, this paper presents a method of accurately computing real-time price elasticity of demand in wholesale electricity markets. The resulting values facilitate the first empirical validation of regression-based estimates of price elasticities, for which the accuracy has never before been evaluated.
{"title":"Real-Time Price Elasticity in Electricity: Evaluating Regression-Based Methods","authors":"J. Chong","doi":"10.2139/ssrn.3732118","DOIUrl":"https://doi.org/10.2139/ssrn.3732118","url":null,"abstract":"With access to highly-detailed data, this paper presents a method of accurately computing real-time price elasticity of demand in wholesale electricity markets. The resulting values facilitate the first empirical validation of regression-based estimates of price elasticities, for which the accuracy has never before been evaluated.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115718465","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Problem definition: The traditional payment system between an insurer and providers does not incentivize providers to limit their prices, nor patients to choose less expensive providers, hence contributing to high insurer expenditures. Reference pricing has been proposed as a way to better align incentives and control the rising costs of healthcare. In this payment system, the insurer determines the maximum amount that can be reimbursed for a procedure (reference price). If a patient selects a provider charging more than the reference price, the patient is responsible for the entire portion above it. Our goal is to understand how reference pricing performs relative to more traditional payment systems. Academic/practical relevance: Our results can help healthcare leaders understand when reference pricing has the potential to be a successful alternative payment mechanism, what its impact on the different stakeholders is, and how to best design it. Methodology: We propose a game-theoretical model to analyze the reference pricing payment scheme. Our model incorporates an insurer that chooses the reference price, multiple competing price-setting providers, and heterogeneous patients who select a provider based on a multinomial logit choice model. Results: We find that the highest-priced providers reduce their prices under reference pricing. Moreover, reference pricing often outperforms the fixed and the variable payment systems both in terms of expected patient utility and insurer cost but incurs a loss in the highest-priced providers’ profit. Furthermore, we show that in general the insurer utility is often higher under reference pricing unless the insurer is a public nonprofit insurer that weighs the providers’ utility as much as its own cost. Managerial implications: Overall, our findings indicate that reference pricing constitutes a promising payment system for “shoppable” healthcare services as long as the insurer does not act similar to a public nonprofit insurer.
{"title":"Reference Pricing for Healthcare Services","authors":"S. Nassiri, Elodie Adida, H. Mamani","doi":"10.2139/ssrn.3176280","DOIUrl":"https://doi.org/10.2139/ssrn.3176280","url":null,"abstract":"Problem definition: The traditional payment system between an insurer and providers does not incentivize providers to limit their prices, nor patients to choose less expensive providers, hence contributing to high insurer expenditures. Reference pricing has been proposed as a way to better align incentives and control the rising costs of healthcare. In this payment system, the insurer determines the maximum amount that can be reimbursed for a procedure (reference price). If a patient selects a provider charging more than the reference price, the patient is responsible for the entire portion above it. Our goal is to understand how reference pricing performs relative to more traditional payment systems. Academic/practical relevance: Our results can help healthcare leaders understand when reference pricing has the potential to be a successful alternative payment mechanism, what its impact on the different stakeholders is, and how to best design it. Methodology: We propose a game-theoretical model to analyze the reference pricing payment scheme. Our model incorporates an insurer that chooses the reference price, multiple competing price-setting providers, and heterogeneous patients who select a provider based on a multinomial logit choice model. Results: We find that the highest-priced providers reduce their prices under reference pricing. Moreover, reference pricing often outperforms the fixed and the variable payment systems both in terms of expected patient utility and insurer cost but incurs a loss in the highest-priced providers’ profit. Furthermore, we show that in general the insurer utility is often higher under reference pricing unless the insurer is a public nonprofit insurer that weighs the providers’ utility as much as its own cost. Managerial implications: Overall, our findings indicate that reference pricing constitutes a promising payment system for “shoppable” healthcare services as long as the insurer does not act similar to a public nonprofit insurer.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121778812","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Food banks are an important part of the food-retailing setting. In 2018, food banks delivered a total of 1.4 billion pounds of donated food to 51.4 million clients. Perhaps more importantly, food banks serve as an important outlet for food that would otherwise be discarded in land-fills, or composted. Despite the economic and social importance of food banks, we know very little of their economic role in food distribution. In this article, we explain the existence of food banks as an essential mechanism to the food-retailing function, permitting food retailers to price-discriminate between high-valuation consumers who visit their stores, and low-valuation consumers who do not. Donating to food banks allows retailers to avoid destructive promotions for fresh products, provide an outlet for over-ordering to prevent stock-outs, and generates valuable tax write-offs. We show how secondary markets for perishable food products improve profitability, and we test the implications of our model using a unique data set of perishable food sales. We find that retailers that take advantage of secondary markets are more profitable than those that do not. Our findings explain the co-existence of traditional food retailers, and food banks.
{"title":"Food Bank Donations and Retail Pricing","authors":"John Lowrey, T. Richards, S. Hamilton","doi":"10.2139/ssrn.3743633","DOIUrl":"https://doi.org/10.2139/ssrn.3743633","url":null,"abstract":"Food banks are an important part of the food-retailing setting. In 2018, food banks delivered a total of 1.4 billion pounds of donated food to 51.4 million clients. Perhaps more importantly, food banks serve as an important outlet for food that would otherwise be discarded in land-fills, or composted. Despite the economic and social importance of food banks, we know very little of their economic role in food distribution. In this article, we explain the existence of food banks as an essential mechanism to the food-retailing function, permitting food retailers to price-discriminate between high-valuation consumers who visit their stores, and low-valuation consumers who do not. Donating to food banks allows retailers to avoid destructive promotions for fresh products, provide an outlet for over-ordering to prevent stock-outs, and generates valuable tax write-offs. We show how secondary markets for perishable food products improve profitability, and we test the implications of our model using a unique data set of perishable food sales. We find that retailers that take advantage of secondary markets are more profitable than those that do not. Our findings explain the co-existence of traditional food retailers, and food banks.","PeriodicalId":321987,"journal":{"name":"ERN: Pricing (Topic)","volume":" 9","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132123931","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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