Structural Models of Pricing

Abstract

In this chapter, we fi rst describe how structural pricing models are different from reduced-form models and what the advantages of using structural pricing models might be. Specifi cally, we discuss how structural models are based on behavioral assumptions of consumer and fi rm behavior, and how these behavioral assumptions translate to market outcomes. Specifying the model from these fi rst principles of behavior makes these models useful for understanding the conditions under which observed market outcomes are generated. Based on the results, managers can conduct simulations to determine the optimal pricing policy should the underlying market conditions (customer tastes, competitive behavior, production costs etc.) change.

Dynamic Pricing in Management Science

“…These models can explain a wide range of pricing schemes. Chatterjee (2009) and Chan et al (2009) provide a literature review of the models that include competition. The first author insists on normative models and the second on descriptive models.…”

“…This is particularly true of Chatterjee et al (2000). Chan et al (2009) offer a synthesis of this literature. In those models, pricing policies are sometimes characterized by using analytical methods, but more often by numerical simulations this shows that incorporating expectations leads to problems too complex to permit analytical results.…”

An Empirical Analysis of Optimal Nonlinear Pricing

“…Our paper is complementary in that it quantifies the same effect for second degree price discrimination, and is one of the few to do so, especially in the context of nonlinear pricing (for other examples of empirical quantification of the effects of second-degree discrimination, see Hendel and Nevo (2013); Draganska and Jain (2006); Verboven (2002); Iyengar and Gupta (2009); Kadiyali et al (1996); Leslie (2004). For a survey of this literature, see Chan et al (2009)). We show that at least in our context, second degree price discrimination recovers only a small portion of the profitability gap between first degree price discrimination and no discrimination at all.…”