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An Empirical Model of Quantity Discounts with Large Choice Sets

Author

Listed:
  • Alessandro Iaria,

    (University of Bristol and CEPR)

  • Wang, Ao

    (University of Warwick)

Abstract
We introduce a Generalized Nested Logit model of demand for bundles that can be estimated sequentially and virtually eliminates any challenge of dimensionality related to large choice sets. We use it to investigate quantity discounts for carbonated soft drinks by simulating a counterfactual with linear pricing. The prices of quantities up to 1L decrease by −31.5% while those of larger quantities increase by +14.8%. Purchased quantities decrease by −20.4%, associated added sugar by −23.8%, and industry profit by −20.5%. Consumer surplus however reduces only moderately, suggesting that linear pricing may be effective in limiting added sugar intake.

Suggested Citation

  • Alessandro Iaria, & Wang, Ao, 2021. "An Empirical Model of Quantity Discounts with Large Choice Sets," The Warwick Economics Research Paper Series (TWERPS) 1378, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1378
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2021/twerp_1378_-_wang.pdf
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    2. Michelle Sovinsky & Liana Jacobi & Alessandra Allocca & Tao Sun, 2023. "More than Joints: Multi-Substance Use, Choice Limitations, and Policy Implications," Rationality and Competition Discussion Paper Series 487, CRC TRR 190 Rationality and Competition.
    3. Mugnier, Martin & Wang, Ao, 2022. "Identification and (Fast) Estimation of Large Nonlinear Panel Models with Two-Way Fixed Effects," The Warwick Economics Research Paper Series (TWERPS) 1422, University of Warwick, Department of Economics.

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