Consumer Demand and Firm Pricing: Lessons From a Large-Scale Natural Field Experiment

Joint Applied Micro Seminar

Abstract
We study consumer demand and firm pricing using data on exogenous price variation from a large-scale field experiment. The data comes from a large US retailer selling hundreds of product categories across thousands of physical locations.  We begin by documenting how consumer demand responds to exogenous changes in prices. Motivated and guided by this experimental evidence, we examine how researchers should model consumer demand. A key advantage of our data is that we have multiple exogenous price levels per product. This allows us both to consistently estimate various models of consumer demand using exogenous price increases, and to credibly assess the ability of the estimated models to predict the quantity and revenue impacts of decreasing prices. We conclude with an analysis of how the choice of consumer demand model affects conclusions about the firm's pricing decisions.