Optimal pricing strategies for a cluster of goods: Own- and cross-price effects with correlated tastes

Date
2016-11-30
Authors
Rosas, Francisco
Acerenza, Santiago
Orazem, Peter
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Altmetrics
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Economics
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Abstract

Contingent valuation methods are used to identify observed and unobserved preferences of goods and services. We apply these methods to compute willingness to pay (WTP) for a product conditional on having purchased another offered product. We provide a derivation for own-price and compensated cross-price elasticities whose results suggest a pricing strategy considering all offered goods simultaneously. Therefore, we solve the social planner’s problem maximizing a weighted function of producer’s revenues and consumer’s utility for the set of optimal prices. We show an application to collegiate sports, but these methods can be extended in a straightforward fashion to other goods.

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Willingness to pay, reservation price, cluster of goods, multi-variate probit analysis, revenue maximizing strategy, unobserved
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