What are the benefits to a wholesaler of price discrimination resulting from privately negotiated prices versus posting a single price? At first glance, one might expect a fish wholesale market to be highly competitive. However, the Fulton Fish market, with its storied history of mafia involvement, has substantial barriers to entry. These barriers to entry have caused an imperfectly competitive environment characterized by negotiated prices. Our aim in this paper is to measure the magnitude of the increase in profits resulting from price discrimination versus posting a single price.
We solve and estimate a dynamic profit-maximization model of a fish wholesaler. Stocks of fish arrive every morning, and the fish must be sold within a relatively short period of time. Throughout the day, retailers arrive sequentially and randomly, but when a retailer shows up, the wholesaler observes his type and thus knows his price elasticity. Therefore the wholesaler can price discriminate across different types of retailers. The fish wholesaler is solving two problems simultaneously: 1) how to optimally price his stock of fish which is falling in value over time and is replenished only once a day; and 2) how to optimally price discriminate across customers with differing price elasticities.
Our model is able to successfully match several key features of the Fulton Fish Market. In particular the model predicts, as we see in the data, that Asian retailers pay about 5 cents per pound less for fish than white retailers. More generally the model matches the mean and variance of prices with large differences in prices across different days as well as considerable intra-day price volatility. Overall, we conclude that the model is a reasonable approximation of the behavior of a Fulton Fish Market wholesaler.
We then impose the restriction that the fish wholesaler must post a uniform price to all retailers, and is therefore unable to price discriminate. In this case, white retailers with inelastic demand pay lower prices and purchase larger quantities of fish. The more price-elastic Asian retailers pay higher prices and purchase less fish. From both types, the wholesaler earns less revenue. However the magnitudes are small. We find that posting a single price only generates about $6 per day less revenue (about 15/100 of one percent of total revenue) compared to price discriminating.
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A Dynamic Model of Price Discrimination and Inventory Management at the Fulton Fish Market
