Price Discrimination with Asymmetric Firms: The Case of The U.S. Carbonated Soft Drinks Market

This paper investigates the relationship between price discrimination and vertical product differentiation, using National Brands and Private Labels in the Carbonated Soft Drink market as a case study. We decompose prices difference into quantity discount and cost difference across packagings and recover marginal cost by a structural demand model of consumer preference and firm behavior. Our results suggest that in the carbonated soft drinks market, both national brands and private labels offers quantity discount to consumers: consumers pay lower unit prices when buying larger packed soft drinks. In addition, the price curvature parameter is lower for private labels, implying that the price schedule is more curved for private label soft drinks than national brands. This means in the CSD market, private labels have more ability to perform price discrimination, segment consumers, and generate high revenues, comparing to national brands. This result, to some extent, explains the growing market shares of private label soft drinks and the significant percentage of total sales from private labels goods for retailers, such as Wal-Mart and Target.