Structural models of pricing

Abstract

In this chapter, we first describe how structural pricing models are different from reduced-form models and what the advantages of using structural pricing models might be. specifically, we discuss how structural models are based on behavioral assumptions of consumer and firm behavior, and how these behavioral assumptions translate to market outcomes. specifying the model from these first principles of behavior makes these models useful for understanding the conditions under which observed market outcomes are generated. based on the results, managers can conduct simulations to determine the optimal pricing policy should the underlying market conditions (customer tastes, competitive behavior, production costs etc.) change.