ABSTRACT Firms in several markets try to attract consumers by offering discounts in other unrelated markets. This promotion strategy, which we call "cross-market discounts," has been successfully adopted in the... more
ABSTRACT Firms in several markets try to attract consumers by offering discounts in other unrelated markets. This promotion strategy, which we call "cross-market discounts," has been successfully adopted in the last few years by many grocery retailers in partnership with gasoline retailers across North America, Europe and Australia. In this paper, we use an analytical model to investigate the major forces driving the profitability of this novel promotion strategy. We consider a generalized scenario in which purchases in a source market lead to price discounts redeemable in a target market. Our analysis shows that this strategy can be a revenue driver by simultaneously increasing prices as well as sales in the source market, even though sales are negatively elastic in price, ceteris paribus. Moreover, it distributes additional consumption (motivated by the discount) in two markets and, under diminishing marginal returns from consumption, this can simultaneously increase firm profits and consumer welfare more effectively than traditional nonlinear pricing strategies. Our study provides many other interesting insights as well, and our key results are in accordance with anecdotal evidence obtained from managers and industry publications.
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ABSTRACT While millions of products are sold on its retail platform, Amazon.com itself stocks and sells only a small fraction of them. Most of these products are sold by third-party sellers, who pay Amazon a fee for each unit sold.... more
ABSTRACT While millions of products are sold on its retail platform, Amazon.com itself stocks and sells only a small fraction of them. Most of these products are sold by third-party sellers, who pay Amazon a fee for each unit sold. Empirical evidence clearly suggests that Amazon tends to sell high-demand products and leave long-tail products for independent sellers to offer. We investigate how a platform owner such as Amazon, facing ex ante demand uncertainty, may strategically learn from these sellers’ early sales which of the “mid-tail” products are worthwhile for its direct selling and which are best left for others to sell. The platform owner’s “cherry-picking” of the successful products, however, gives an independent seller the incentive to mask any high demand by lowering his sales with a reduced service level (unobserved by the platform owner). We analyze this strategic interaction between the platform owner and the independent seller using a game-theoretic model with two types of sellers — one with high demand and one with low demand. We show that it may not always be optimal for the platform owner to identify the seller’s demand. Interestingly, the platform owner may be worse off by retaining its option to sell the independent seller’s product whereas both types of sellers may benefit from the platform owner’s threat of entry. The platform owner’s entry option may reduce the consumer surplus in the early period though it increases the consumer surplus in the later period. We also investigate how consumer reviews influence the market outcome.
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Consumers using sharing economy platforms such as Airbnb are challenged with high product uncertainty and search cost. To ameliorate these issues, Airbnb has implemented many strategies such as professionally taking high quality photos... more
Consumers using sharing economy platforms such as Airbnb are challenged with high product uncertainty and search cost. To ameliorate these issues, Airbnb has implemented many strategies such as professionally taking high quality photos for hosts and calling them verified. In this paper we study the impact of having unit list's photos verified. To assess the aesthetic quality of images, we use machine learning techniques. Employing Difference-in-Difference analysis, we find that on average, rooms with verified photos are 9% more frequently booked. We further separate the effect of photo verification from photo quality and room reviews and find an extra $2,455 in yearly earnings brought by high photo quality. Lastly, we look at the properties in the same neighborhood and find asymmetric spillover effects. On the neighborhood level, the results suggest higher overall demand if more rooms have verified photos.
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Although online advertising is the lifeline of many internet content platforms, the usage of ad blockers has surged in recent years, presenting a challenge to platforms dependent on ad revenue. Using a simple analytical model with two... more
Although online advertising is the lifeline of many internet content platforms, the usage of ad blockers has surged in recent years, presenting a challenge to platforms dependent on ad revenue. Using a simple analytical model with two competing platforms, we show that the presence of ad blockers can actually benefit platforms. In particular, there are conditions under which the optimal equilibrium strategy for the platforms is to allow the use of ad blockers (rather than using an ad-block wall or charging a fee for viewing ad-free content). The key insight is that allowing ad blockers serves to differentiate platform users based on their disutility to viewing ads. This allows platforms to increase their ad intensity on those that do not use the ad blockers and achieve higher returns than in a world without ad blockers. We show robustness of these results when we allow a larger combination of platform strategies, as well as by explaining how ad white-listing schemes offered by modern...
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We explain why dominant firms give away good-quality products for free when network externalities are present.
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In this editorial accompanying the Special Section on Marketing Science in Emerging Markets (MSEM), we describe how research on emerging markets can contribute to richer theoretical and substantive understanding of markets and marketing.... more
In this editorial accompanying the Special Section on Marketing Science in Emerging Markets (MSEM), we describe how research on emerging markets can contribute to richer theoretical and substantive understanding of markets and marketing. Such research can also aid in providing managerial guidance on how to operate in emerging markets. We conclude with a description of the selection and review process for the special section and an overview of the four papers being published.
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There has been rapidly growing interest in structural models, and the review paper by Chintagunta et al. (2006) is a timely contribution. The paper identifies the key issues and provides an excellent assessment. A contemporaneous paper by... more
There has been rapidly growing interest in structural models, and the review paper by Chintagunta et al. (2006) is a timely contribution. The paper identifies the key issues and provides an excellent assessment. A contemporaneous paper by Erdem et al. (2005) also offers a critical examination on some of the issues. My comments are in three areas. First, I selectively revisit some of the key issues in the paper and, in doing so, I hope I shed additional insight on these issues. Second, I discuss some of the recent papers that build on established psychological consumer behaviors. Third, I offer a brief list of potentially significant substantive problems for which structural models will be insightful.
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In this field study, conducted at a leading avionics guidance systems manufacturer, we gathered primary dataon time and cost performance of both the design and manufacturing phases of new product development (NPD). We modeled the impact... more
In this field study, conducted at a leading avionics guidance systems manufacturer, we gathered primary dataon time and cost performance of both the design and manufacturing phases of new product development (NPD). We modeled the impact of the management levers relating to oversight, the intensity of design spe-cialization, and the level of interaction with the customer. The study highlights the necessity of leveraging the interdependencies between the design and manufacturing phases in NPD. Key words: time to market; new product development; project management; cost and time trade-offs; customer involvement; financial metrics; NPD History: Accepted by Teck H. Ho and Christopher S. Tang, special issue editors; received June 2001. This paper was with the authors 13 months for 2 revisions. 1.
In 2012, consumers paid $32 billion in overdraft fees, representing the single largest source of revenue for banks from demand deposit accounts during this period. Owing to consumer attrition caused by overdraft fees and potential... more
In 2012, consumers paid $32 billion in overdraft fees, representing the single largest source of revenue for banks from demand deposit accounts during this period. Owing to consumer attrition caused by overdraft fees and potential government regulations to reform these fees, financial institutions have become motivated to investigate their overdraft fee structures. Banks need to balance the revenue generated from overdraft fees with consumer dissatisfaction and potential churn caused by these fees. However, no empirical research has been conducted to explain consumer responses to overdraft fees or to evaluate alternative pricing and product strategies associated with these fees. In this research, we propose a dynamic structural model with consumer monitoring costs and dissatisfaction associated with overdraft fees. We find that consumers heavily discount the future and potentially overdraw because of impulsive spending. However, we also find that high monitoring costs hinder consume...
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Chronic diseases, which account for 75% of healthcare expenditure, are of particular importance in trying to understand the rapid growth of healthcare costs over the last few decades. Individuals suffering from chronic diseases can... more
Chronic diseases, which account for 75% of healthcare expenditure, are of particular importance in trying to understand the rapid growth of healthcare costs over the last few decades. Individuals suffering from chronic diseases can consume three types of services: secondary preventive care, which includes diagnostic tests; primary preventive care, which consists of drugs that help prevent the illness from getting worse; and curative care, which includes surgeries and expensive drugs that provide a quantum boost to the patient’s health. Although the majority of cases can be managed by preventive care, most consumers opt for more expensive curative care that leads to a substantial increase in overall costs. To examine these inefficiencies, we build a model of consumers’ annual medical insurance plan decisions and periodic consumption decisions and apply it to a panel data set. Our results indicate that there exists a sizable segment of consumers who purchase more comprehensive plans t...
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This series of discussions presents commentaries and a reply on Zhang et al. [Zhang Y, Bradlow ET, Small DS (2015) Predicting customer value using clumpiness: From RFM to RFMC. Marketing Sci. 34(2):195–208].
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SYNOPSIS AND INTRODUCTION: Managers frequently choose the amounts to expend in various activities simultaneously rather than sequen-tially. Quality costs provide a common example. When managing quality, decisions to invest in different... more
SYNOPSIS AND INTRODUCTION: Managers frequently choose the amounts to expend in various activities simultaneously rather than sequen-tially. Quality costs provide a common example. When managing quality, decisions to invest in different types of prevention ...
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Call for Nominations for a new editor-in-chief, Marketing Science. Deadline for nominations: May 15, 2007.
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This study explores the implications of rejecting the sealed-bid abstraction proposed by Zeithammer and Adams [Zeithammer, R., C. Adams. 2010. The sealed-bid abstraction in online auctions. Marketing Sci. 29(6) 964–987]. Using a... more
This study explores the implications of rejecting the sealed-bid abstraction proposed by Zeithammer and Adams [Zeithammer, R., C. Adams. 2010. The sealed-bid abstraction in online auctions. Marketing Sci. 29(6) 964–987]. Using a conditional order statistic model that relies on the joint distribution of the top two proxy bids of an auction, Zeithammer and Adams show that inexperienced bidders' reactive bidding is the main cause of the rejection of the sealed-bid abstraction. Their empirical study suggests that a large percentage of bidders reactively bid, and there is weak evolutionary pressure for bidders to converge to sealed bidding. We discuss theoretical implications of this rejection and the role of bidder experience, as well as inferences about bidder learning. Tracking an inexperienced bidder's bidding behavior over time, we show that bidders learn and their bidding strategy gravitates toward rational bidding. Potential biases in bidder experience measurement and bidd...
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In many service markets such as consulting, auto repair, financial planning, and healthcare, the service provider may have more information about the customer’s problem than the customer, and different customers may impose different costs... more
In many service markets such as consulting, auto repair, financial planning, and healthcare, the service provider may have more information about the customer’s problem than the customer, and different customers may impose different costs on the service provider. In principle, the service provider should ethically care about the customer’s welfare, but it is possible that a provider may maximize only its own profit. Moreover, the customer may not know ex ante whether the provider is ethical or purely self-interested. We develop a game-theoretic model to investigate pricing strategies and the market outcome in service markets where the provider has two-dimensional private information about her own type (whether ethical or self-interested) and about the customer’s condition (whether serious or minor). We show that in a less ethical market, a self-interested provider will charge different prices based on the customer’s condition, whereas an ethical provider will charge the same price f...
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Direct marketing is witnessing explosive growth. As consumers increasingly purchase products from their homes, their ability to judge the quality of products they buy is significantly reduced. In this paper we study how money-back... more
Direct marketing is witnessing explosive growth. As consumers increasingly purchase products from their homes, their ability to judge the quality of products they buy is significantly reduced. In this paper we study how money-back guarantees can signal product quality in such environments. We interpret product quality broadly to mean both the level of attributes promised as well as the firm's consistency in delivering on those promises. Key aspects of our formulation are the explicit consideration of transaction costs, and alternative signals of product quality. Transaction costs are the costs the seller or buyer faces when redeeming a money-back guarantee. We show that money-back guarantees signal quality by exploiting the higher probability of returns for a lower quality product, and the attendant higher transaction costs. However, if the seller's transaction costs are very large, then there are less costly ways to signal, namely charging a high price. We compare the signa...
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Product design decisions substantially affect the cost and revenue drivers. A design configuration with commonality can lower manufacturing cost. However, such a design may hinder the ability to extract price premiums through product... more
Product design decisions substantially affect the cost and revenue drivers. A design configuration with commonality can lower manufacturing cost. However, such a design may hinder the ability to extract price premiums through product differentiation. We explicitly investigate the marketing-manufacturing trade-off and derive analytical implications for three possible design configurations: unique, premium-common, and basic-common. Our model considers two distinct segments of consumers. Some of the implications of our analysis are not readily apparent. For example, when the high-quality component is made common, the average quality of the products offered to the two segments increases. One may infer that with higher average quality, higher prices or higher total revenues might ensue. However, this may not be the case, as detailed in the paper. Finally, our analysis provides a useful framework to develop an index that can rank order components in terms of their attractiveness for commo...
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A low-cost incumbent may limit price to informatively signal her cost to an uncertain potential entrant, and therefore deter entry. We enrich this model by investigating the strategic pricing behavior of the incumbent when she operates in... more
A low-cost incumbent may limit price to informatively signal her cost to an uncertain potential entrant, and therefore deter entry. We enrich this model by investigating the strategic pricing behavior of the incumbent when she operates in multiple markets. We demonstrate that the low-cost incumbent's ability to separate from a ghost high-cost type is enhanced when she combines her signalling effort across markets, instead of independent signalling in each market. We show that, in the combined least-cost signalling, the low-cost incumbent limit prices in each market. In an attempt to minimize dissipative but informative signalling costs, the low-cost incumbent may enter unprofitable markets, but exit after credible separation.
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We study the signalling strategy of a principal who is privately informed about its high demand potential to an uninformed risk-neutral agent. We analyze the model in the context of a contract between a franchisor and a franchisee. We... more
We study the signalling strategy of a principal who is privately informed about its high demand potential to an uninformed risk-neutral agent. We analyze the model in the context of a contract between a franchisor and a franchisee. We examine the distortions of a two-part pricing scheme necessary to credibly inform the franchisee (agent). We also study whether the inability of the franchisor (principal) to observe the agent’s effort moderates or exaggerates the distortions from the first-best two-part pricing scheme. A surprising outcome is that even though the principal incurs greater signalling cost, the magnitude of distortion in the two-part scheme is smaller when service is unobservable than when it is not. Thus, a signalling strategy employing the fixed and variable fees is harder to detect under moral hazard. Empirical studies failing to control for moral hazard may incorrectly conclude that signalling strategy does not occur. We later consider a three-part scheme to verify w...
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Manufacturers of consumer products often complain of lower profits in light of the growing channel dominance of retailers such as Wal-Mart, Home Depot, and other “power retailers.” The authors argue that this complaint might not be valid.... more
Manufacturers of consumer products often complain of lower profits in light of the growing channel dominance of retailers such as Wal-Mart, Home Depot, and other “power retailers.” The authors argue that this complaint might not be valid. In an analytical model of competing manufacturers and competing multiproduct retailers, the authors show that manufacturers may actually experience increased profits when a retailer gains an exogenous cost advantage over its rival retailer. Potential channel efficiencies exist when retailing costs are reduced. The authors illustrate that channel transactions based on bilateral bargaining capture these efficiencies by transferring market share to the more efficient retailer, thus increasing channel profits. In a bargaining relationship between a manufacturer and a retailer, the manufacturer realizes some of these enhanced efficiencies. The authors discuss the managerial implications for pricing in channels.
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Abstract: Clickstream data provides information about the sequence of pages viewed by a visitor as they move through a web site. A valuable facet of this data is the navigation or web path the user has chosen to traverse the web site.... more
Abstract: Clickstream data provides information about the sequence of pages viewed by a visitor as they move through a web site. A valuable facet of this data is the navigation or web path the user has chosen to traverse the web site. This path reflects a user's goals, which ...
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Advances in information technology increasingly allow firms to identify expensive, high-cost customers, who are not only individually less profitable for firms but also raise the average marginal cost incurred by firms and thus impose a... more
Advances in information technology increasingly allow firms to identify expensive, high-cost customers, who are not only individually less profitable for firms but also raise the average marginal cost incurred by firms and thus impose a negative externality on inexpensive customers. ...
Abstract Social network platforms and social media rely on the contributions of individual users to stay relevant. Consumers (users) contribute content such as photographs, videos, tweets etc.: these are available to any of their friends... more
Abstract Social network platforms and social media rely on the contributions of individual users to stay relevant. Consumers (users) contribute content such as photographs, videos, tweets etc.: these are available to any of their friends or peers, but not to unaffiliated users. ...