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Abstract
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 dis-
count 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 la-
bels, 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, com-
paring 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.