Automobile engine variants and price discrimination

Using a structural model of demand for automobile engine variants, this paper finds that there is second-degree price discrimination: markups increase with engine size. Still, average markups are lower than when models have just one engine. The paper develops the first empirical demand framework suitable for markets with variants. There is an unobserved product characteristic and a consumer-specific logit term for classes of products, but both are fixed across variants. Fixed effects control for unobservables. The literature’s assumption of orthogonality between unobserved and observed product characteristics is not needed.