Price Heterogeneity as a Source of Heterogeneous Demand

Abstract

We explore heterogeneous prices as a source of heterogeneous or stochastic demand. Heterogeneous prices could arise either because there is actual price variation among consumers or because consumers (mis)perceive prices differently. Our main result says the following: if heterogeneous prices have a distribution among consumers that is (in a sense) stable across observations, then a model where consumers have a common utility function but face heterogeneous prices has precisely the same implications as a heterogeneous preference/random utility model (with no price heterogeneity).