Price Heterogeneity as a source of Heterogenous Demand

TL;DR

This paper investigates how heterogenous prices influence demand variability, showing that stable price distributions lead to demand patterns similar to models with preference heterogeneity, whether due to actual or perceived price differences.

Contribution

It demonstrates the equivalence between models with stable heterogenous prices and preference heterogeneity in demand analysis.

Findings

Stable heterogenous price distributions replicate demand heterogeneity.

Models with price variation and models with preference heterogeneity are equivalent.

Price perception differences can explain demand variability.

Abstract

We explore heterogenous prices as a source of heterogenous or stochastic demand. Heterogenous prices could arise either because there is actual price variation among consumers or because consumers (mis)perceive prices differently. Our main result says the following: if heterogenous prices have a distribution among consumers that is (in a sense) stable across observations, then a model where consumers have a common utility function but face heterogenous prices has precisely the same implications as a heterogenous preference/random utility model (with no price heterogeneity)