Essays in Nonlinear Pricing Under Regulation: Analysis of Interventions on Food Retailing

In this dissertation I present three essays. The overarching theme of these projects is how price-discriminating sellers endogenously modify their pricing schemes in the face of regulatory interventions. The application I have in mind when writing the papers is that of a food retailer deciding menu characteristics, such as price and quantity, in the context of a given food policy environment. The particular policies I consider are portion cap rules and taxes, both designed by the policy-maker to reduce the consumption of certain foods and ingredients. My approach diverges from studies focusing on buyers' reactions to paternalistic food policies by placing the seller at the center of the analysis. I use models of nonlinear pricing to derive hypotheses, which I test in controlled laboratory experiments. In the first two essays I explore the economic impacts of taxes and portion cap rules when single-product sellers serve privately informed buyers. In the third, I examine the economic effects of portion cap rules when two-product sellers serve buyers with private preferences. In the first essay, collective work with Dr. Joseph Balagtas and Dr. Steven Wu, I compare the impacts of taxes and portion control rules on profit and consumer surplus. I model the pricing problem of a single-product seller serving two types of privately-informed customers. I aim to answer the following questions: i) what effects do taxes have on portion sizes, buyer surplus, and seller's expected profit; ii) how does the tax affect the seller's ability to screen the market, and iii) how the effects of taxes and portion cap rules compare. I find that under a tax regime, all package sizes are smaller; high willingness to pay buyers see a reduction in their surplus, and the retailer's expected profit is unambiguously diminished. Both policy instruments curb consumption. In contrast with tax regimes, however, cap rules leave buyer surplus unaffected. These outcomes suggest that portion control rules might be a preferred over tax regimes as methods to regulate consumption of calorie-dense and low-nutrient foods traded in settings where retailers engage in second-degree price discrimination.In the second paper, also joint work with Dr. Joseph Balagtas and Dr. Steven Wu, I report a controlled laboratory experiment designed to test the results of my first essay. In this project, human subjects take on the role of sellers and are free to decide their pricing strategies, including number of ``packages'', their price and their quantity. We vary the policy environment across treatments,and these include: unregulated baseline, cap rule, and specific tax. My principal goal is to test the theoretical outcomes of the first essay and find which regulation is associated with a smaller negative impact on consumers' economic surplus in the laboratory. My main finding is that the cap does not impact buyers' information rents regardless of the seller's segmentation scheme; while the effect of the tax is contingent on the seller's strategy and is neutral at best.In the last essay, I study the economic impacts resulting from enforcing a maximum-quantity limit on one of the two products offered by a seller facing demand from privately-informed heterogeneous buyers. Specifically, I look at impacts on: i) consumption of the regulated component, ii) purchases of the unregulated item, and iii) consumer surplus. Hypotheses derived from a bi-dimensional nonlinear pricing predict reductions in consumption of the target component, changes in consumption of the unregulated product by some buyers, and mixed impacts on consumer surplus. Data from a laboratory experiment corroborates the predictions regarding consumption of the regulated good; however, no significant changes in consumption of the unregulated product are found, surprisingly a subset of buyers are better-off after the cap rule while no buyer type is worse-off. The results have implications for food policy discussions around portion cap rules, where the assumption that these regulations negatively impact consumers' well-being largely drives public debate.