Showing papers in "Marketing Science in 2013"
TL;DR: This work empirically study the motivations of users to contribute content to social media in the context of the popular microblogging site Twitter, focusing on noncommercial users who do not benefit financially from their contributions.
Abstract: We empirically study the motivations of users to contribute content to social media in the context of the popular microblogging site Twitter. We focus on noncommercial users who do not benefit financially from their contributions. Previous literature suggests that there are two main types of utility that motivate these users to post content: intrinsic utility and image-related utility. We leverage the fact that these two types of utility give rise to different predictions as to whether users should increase their contributions when their number of followers increases. To address the issue that the number of followers is endogenous, we conducted a field experiment in which we exogenously added followers or follow requests, in the case of protected accounts to a set of users over a period of time and compared their posting activities to those of a control group. We estimated each treated user's utility function using a dynamic discrete choice model. Although our results are consistent with both types of utility being at play, our model suggests that image-related utility is larger for most users. We discuss the implications of our findings for the evolution of Twitter and the type of value firms may derive from such platforms in the future.
372 citations
TL;DR: A methodology to measure social media return on investment ROI and a customer's word-of-mouth WOM value is proposed and implemented and shows that social media can be used to generate growth in sales, ROI, and positive word of mouth and can spread brand knowledge further.
Abstract: Hokey Pokey, a popular “super premium” ice cream retailer, has over a dozen outlets based in India. Hokey Pokey offers “customized mix-in” flavors and realizes the importance of social media platforms to connect with its target consumers and create an engaging brand experience. However, with a limited marketing budget, the retailer needed to measure the success of its social media marketing efforts and create an optimized strategy. To accomplish this, we proposed and implemented a methodology to measure social media return on investment ROI and a customer's word-of-mouth WOM value by first creating a unique metric to measure the net influence wielded by a user in a social network, customer influence effect CIE, and then predicting the user's ability to generate the spread of viral information. We then link WOM to the actual sales that it generates through a second metric, customer influence value CIV, and we implement a strategy at Hokey Pokey to measure these metrics and identify their individual drivers. Finally, we refine our strategy to increase CIE and CIV, thereby impacting the profit. Our research shows that social media can be used to generate growth in sales, ROI, and positive word of mouth and can spread brand knowledge further.
265 citations
TL;DR: In this article, a structural model was proposed to study the effect of online product reviews on consumer purchases of experiential products, and the authors found that consumers learn more from online reviews of book titles than from their own experience with other books of the same genre.
Abstract: We propose a structural model to study the effect of online product reviews on consumer purchases of experiential products. Such purchases are characterized by limited repeat purchase behavior of the same product item such as a book title but significant past usage experience with other products of the same type such as books of the same genre. To cope with the uncertainty in quality of the product item, we posit that consumers may learn from their experience with the same type of product and others' experiences with the product item. We model the review credibility as the precision with which product reviews reflect the consumer's own product evaluation. The higher the precision, the more credible the information obtained from product reviews for the consumer, and the larger the effect of reviews on the consumer's choice probabilities. We extend the Bayesian learning framework to model consumer learning on both product quality and review credibility. We apply the model to a panel data set of 1,919 book purchases by 243 consumers. We find that consumers learn more from online reviews of book titles than from their own experience with other books of the same genre. In the counterfactual analysis, we illustrate the profit impact of product reviews and how it varies with the number of reviews. We also study the phenomenon of fake reviews. We find that fake reviews increase consumer uncertainty. The effects of more positive reviews and more numerous reviews on consumer choice are smaller on online retailing platforms that have fake product reviews.
141 citations
TL;DR: In this paper, the authors examined the impact of search engine optimization on the competition between advertisers for organic and sponsored search results and found that a positive level of optimization may improve the search engine's ranking quality and thus the satisfaction of its visitors.
Abstract: This paper examines the impact of search engine optimization SEO on the competition between advertisers for organic and sponsored search results. The results show that a positive level of search engine optimization may improve the search engine's ranking quality and thus the satisfaction of its visitors. In the absence of sponsored links, the organic ranking is improved by SEO if and only if the quality provided by a website is sufficiently positively correlated with its valuation for consumers. In the presence of sponsored links, the results are accentuated and hold regardless of the correlation. When sponsored links serve as a second chance to acquire clicks from the search engine, low-quality websites have a reduced incentive to invest in SEO, giving an advantage to their high-quality counterparts. As a result of the high expected quality on the organic side, consumers begin their search with an organic click. Although SEO can improve consumer welfare and the payoff of high-quality sites, we find that the search engine's revenues are typically lower when advertisers spend more on SEO and thus less on sponsored links. Modeling the impact of the minimum bid set by the search engine reveals an inverse U-shaped relationship between the minimum bid and search engine profits, suggesting an optimal minimum bid that is decreasing in the level of SEO activity.
112 citations
TL;DR: It is determined that from 2000 to 2010, the Nike golf ball division reaped an additional profit of $103 million through the acquisition of 9.9 million in sales from Tiger Woods' endorsement effect.
Abstract: In this paper we quantify the economic worth of celebrity endorsements by studying the sales of endorsed products. We do so with the use of two unique data sets consisting of monthly golf ball sales and professional golfer celebrity rankings. In particular, we examine the impact Tiger Woods had on sales of Nike golf balls. Our identification of the causal effect of a celebrity is grounded in the celebrity's random performance over time.
Using two different approaches, reduced form and structural, we find that there are substantial celebrity endorsement effects. From our structural model, we determine that endorsements not only induce consumers to switch brands, a business stealing effect, but also have a primary demand effect. We determine that from 2000 to 2010, the Nike golf ball division reaped an additional profit of $103 million through the acquisition of 9.9 million in sales from Tiger Woods' endorsement effect. Moreover, having Tiger Woods' endorsement led to a price premium of roughly 2.5%. As a result, approximately 57% of Nike's investment in Woods' $181 million endorsement deal was recovered just in U.S. golf ball sales alone.
110 citations
TL;DR: Simulation results suggest that online advertisers can increase the number of website visits and conversions by varying the creative content shown to an individual according to that person's history of previous ad impressions.
Abstract: Online advertising campaigns often consist of multiple ads, each with different creative content We consider how various creatives in a campaign differentially affect behavior given the targeted individual's ad impression history, as characterized by the timing and mix of previously seen ad creatives Specifically, we examine the impact that each ad impression has on visiting and conversion behavior at the advertised brand's website We accommodate both observed and unobserved individual heterogeneity and take into account correlations among the rates of ad impressions, website visits, and conversions We also allow for the accumulation and decay of advertising effects, as well as ad wearout and restoration effects Our results highlight the importance of accommodating both the existence of multiple ad creatives in an ad campaign and the impact of an individual's ad impression history Simulation results suggest that online advertisers can increase the number of website visits and conversions by varying the creative content shown to an individual according to that person's history of previous ad impressions For our data, we show a 127% increase in the expected number of visits and a 138% increase in the expected number of conversions
105 citations
TL;DR: It is argued that learning models have contributed greatly to the understanding of consumer behavior---in particular, in enhancing the authors' understanding of brand loyalty and long-run advertising effects.
Abstract: Learning models extend the traditional discrete choice framework by postulating that consumers have incomplete information about product attributes and that they learn about these attributes over time. In this survey we describe the literature on learning models that has developed over the past 20 years, using the model of Erdem and Keane as a unifying framework [Erdem T, Keane M (1996) Decision-making under uncertainty: Capturing dynamic brand choice processes in turbulent consumer goods markets. Marketing Sci. 15(1):1–20]. We describe how subsequent work has extended their modeling framework and applied learning models to a wide range of different products and markets. We argue that learning models have contributed greatly to our understanding of consumer behavior—in particular, in enhancing our understanding of brand loyalty and long-run advertising effects. We also discuss the limitations of existing learning models and potential extensions. One key challenge is to disentangle learning as a source of ...
101 citations
TL;DR: A model in which usage and renewal are modeled simultaneously by assuming that both behaviors reflect a common latent variable that evolves over time, which outperforms a set of benchmark models on several important dimensions and provides several insights that can be useful for managers.
Abstract: As firms become more customer-centric, concepts such as customer equity come to the fore. Any serious attempt to quantify customer equity requires modeling techniques that can provide accurate multiperiod forecasts of customer behavior. Although a number of researchers have explored the problem of modeling customer churn in contractual settings, there is surprisingly limited research on the modeling of usage while under contract. The present work contributes to the existing literature by developing an integrated model of usage and retention in contractual settings. The proposed method fully leverages the interdependencies between these two behaviors even when they occur on different time scales or “clocks”, as is typically the case in most contractual/subscription-based business settings.
We propose a model in which usage and renewal are modeled simultaneously by assuming that both behaviors reflect a common latent variable that evolves over time. We capture the dynamics in the latent variable using a hidden Markov model with a heterogeneous transition matrix and allow for unobserved heterogeneity in the associated usage process to capture time-invariant differences across customers.
The model is validated using data from an organization in which an annual membership is required to gain the right to buy its products and services. We show that the proposed model outperforms a set of benchmark models on several important dimensions. Furthermore, the model provides several insights that can be useful for managers. For example, we show how our model can be used to dynamically segment the customer base and identify the most common “paths to death” i.e., stages that customers go through before churn.
100 citations
TL;DR: This article used the 2000 and 2004 general elections to analyze the effect of market-level advertising on county-level vote shares and found significant positive effects of advertising exposures on the election outcomes.
Abstract: Presidential elections provide both an important context in which to study advertising and a setting that mitigates the challenges of dynamics and endogeneity. We use the 2000 and 2004 general elections to analyze the effect of market-level advertising on county-level vote shares. The results indicate significant positive effects of advertising exposures. Both instrumental variables and fixed effects alter the ad coefficient. Advertising elasticities are smaller than are typical for branded goods yet significant enough to shift election outcomes. For example, if advertising were set to zero and all other factors held constant, three states' electoral votes would have changed parties in 2000. Given the narrow margin of victory in 2000, this shift would have resulted in a different president.
88 citations
TL;DR: It turns out that refraining from brand image advertising may be optimal for the firm when the product is especially well positioned to create a strong identity---i.e., when consumer preferences for functional and self-expressive attributes are highly correlated.
Abstract: Until recently, brand identities were built by firms via brand image advertising. However, the flourishing consumer communication weakened the firms' grip on their brands. The interaction between advertising and consumer communications and their joint impact on brand identity is the focal point of this paper.
We present a model in which consumer preference for functional attributes may correlate with the identity they desire to project of themselves. This correlation is known to the firm but not to the consumers. Both the firm and the consumers can communicate their desired brand identity, although the actual brand identity is determined endogeneously by the composition of consumers who purchase it i.e., what types of people consume the brand.
We find that sometimes the firm can strengthen the identity of its brand by refraining from advertising. This result is based on the following intermediate finding: advertising can diminish the endogeneous informativeness of consumer communications by making it one-sided. Furthermore, it turns out that refraining from brand image advertising may be optimal for the firm when the product is especially well positioned to create a strong identity---i.e., when consumer preferences for functional and self-expressive attributes are highly correlated.
82 citations
TL;DR: In this article, a dynamic structural framework is presented to estimate the returns to seller reputations in freelance sites, where a buyer decides in each period whether to choose a bid from her current set of bids, cancel the auction, or wait for more bids.
Abstract: Online freelance marketplaces are websites that match buyers of electronically deliverable services with freelancers. Although freelancing has grown in recent years, it faces the classic “information asymmetry” problem---buyers face uncertainty over seller quality. Typically, these markets use reputation systems to alleviate this issue, but the effectiveness of these systems is open to debate. We present a dynamic structural framework to estimate the returns to seller reputations in freelance sites. In our model, a buyer decides in each period whether to choose a bid from her current set of bids, cancel the auction, or wait for more bids. In the process, she trades off sellers' price, reputation, and other attributes, as well as the costs of waiting and canceling. Our framework addresses dynamic selection, which can lead to underestimation of reputation, through two types of persistent unobserved heterogeneities: bid arrival rates and buyers' unobserved preference for bids. We apply our framework to data from a leading freelance firm. We find that buyers are forward looking, that they place significant weight on seller reputation, and that not controlling for dynamics and selection can bias reputation estimates. Using counterfactual simulations, we infer the dollar value of seller reputations and provide guidelines to managers of freelance firms.
TL;DR: This work considers a market where consumers are heterogeneous in their valuation of product quality and analyzes an NBM's response to an SB threat, and develops a descriptive theory that clarifies the incentives of the NBM to accommodate, displace, or buffer.
Abstract: Nearly a quarter of all products purchased in U.S. supermarkets and drug stores are store brands SBs. Although the presence of SBs benefits both consumers and retailers, it is a threat to the dominance of the incumbent national brand manufacturers NBMs. When considering the potential threat of an SB, an NBM generally pursues one of three strategies: accommodate, displace, or buffer. Under the accommodation strategy, the NBM repositions the products in his existing product line. Under the displacement strategy, the NBM elects to supply the SB to preempt the entry of the SB supplier. Under the buffering strategy, the NBM adds a defender product, which competes with his own product offering and the new SB. Using a game-theoretic model, we consider a market where consumers are heterogeneous in their valuation of product quality and analyze an NBM's response to an SB threat. We focus on two important drivers: the NBM's ability to differentiate on the quality dimensions and his cost advantage over the outside supplier of SB. To completely characterize the NBM's response, we consider two regimes. In the first regime, the NBM is a monopolist producer. In the second regime, the retailer has the added option of procuring an SB product from an independent, nonstrategic SB manufacturer. By comparing the results from both regimes, we develop a descriptive theory that clarifies the incentives of the NBM to accommodate, displace, or buffer. In doing this, we determine how the NBM's whole product portfolio should be designed, i.e., the positioning quality levels and prices of all its offerings.
TL;DR: An analytical model is developed that demonstrates that high intrinsic quality indirectly generates exclusivity via pricing effects; in turn, this exclusivity generates considerable social payoffs where consumers value status.
Abstract: How do firms develop marketing strategy when consumers seek to satisfy both quality and status-related considerations? We develop an analytical model to study this issue, examining both pricing and product management decisions in markets for conspicuous durable goods. Our analysis yields many interesting and nontrivial insights. First, we demonstrate that high intrinsic quality indirectly generates exclusivity via pricing effects; in turn, this exclusivity generates considerable social payoffs where consumers value status. This insight reverses the direction of causality in the existing literature, wherein only status considerations matter and mere price increases may enhance consumer utility. Second, our dynamic model indicates that where consumers prioritize status benefits, producers incur substantial price depreciation in equilibrium. Third, we examine the product management strategies used by firms to preserve early adopter exclusivity. Finally, we discuss the boundary conditions of our results as well as our results' implications for managerial and policy issues.
TL;DR: In this article, a consumer choice model was developed from micro-foundations to capture the essentials of the handheld video game market, and the authors provided a framework to understand the dynamic, long-term effects of bundling on demand.
Abstract: Several key questions in bundling have not been empirically examined in marketing: Is mixed bundling more effective than pure bundling or pure components? Does correlation in consumer valuations make bundling more or less effective? Does bundling serve as a complement or substitute to network effects? To address these questions, we develop a consumer-choice model from microfoundations to capture the essentials of our setting, the handheld video game market. We provide a framework to understand the dynamic, long-term effects of bundling on demand. The primary explanation for the profitability of bundling relies on homogenization of consumer valuations for the bundle, allowing the firm to extract more surplus. We find that bundling can be effective through a novel and previously unexamined mechanism of dynamic consumer segmentation, which operates independent of the homogenization effect, and can in fact be stronger when the homogenization effect is weaker. We also find that bundles are treated as separate products (distinct from component products) by consumers. Sales of both hardware and software components decrease in the absence of bundling, and consumers who had previously purchased bundles might delay purchases, resulting in lower revenues. We also find that mixed bundling dominates pure bundling and pure components in terms of both hardware and software revenues. Investigating the link between bundling and indirect network effects, we find that they act as substitute strategies, with a lower relative effectiveness for bundling when network effects are stronger.
TL;DR: The authors proposed a parsimonious model that allows direct marketing to impact three relevant behaviors in latent attrition models, i.e., the frequency with which customers conduct transactions, the size of the transactions, and the duration for which customers remain active.
Abstract: When defection is unobserved, latent attrition models provide useful insights about customer behavior and accurate forecasts of customer value. Yet extant models ignore direct marketing efforts. Response models incorporate the effects of direct marketing, but because they ignore latent attrition, they may lead firms to waste resources on inactive customers.
We propose a parsimonious model that allows direct marketing to impact three relevant behaviors in latent attrition models---the frequency with which customers conduct transactions, the size of the transactions, and the duration for which customers remain active. Our model also accounts for how the organization targets its direct marketing across individuals and over time.
Using donation data from a nonprofit organization, we find that direct marketing increases donation incidence for active donors. However, our analysis also shows that direct marketing has the potential to shorten the length of a donor's relationship. We find that our proposed model offers superior predictive performance compared with models that ignore the impact of direct marketing activity or latent attrition. We demonstrate the managerial applicability of our modeling approach by estimating the impact of direct marketing on donation behavior and identifying those donors most likely to conduct transactions in the future.
TL;DR: In this article, the authors incorporate consumers' concerns of peer-induced price fairness into a model of price competition and show that a uniform price for branded variants may emerge in equilibrium.
Abstract: The extensive adoption of uniform pricing for branded variants is a puzzling phenomenon, considering that firms may improve profitability through price discrimination. In this paper, we incorporate consumers' concerns of peer-induced price fairness into a model of price competition and show that a uniform price for branded variants may emerge in equilibrium. Interestingly, we find that uniform pricing induced by consumers' concerns of fairness can actually help mitigate price competition and hence increase firms' profits if the demand of the product category is expandable. Furthermore, an individual firm may not have an incentive to unilaterally mitigate consumers' concerns of price fairness to its own branded variants, which suggests the long-run sustainability of the uniform pricing strategy. As a result, fairness concerns from consumers provide a natural mechanism for firms to commit to uniform pricing and enhance their profits.
TL;DR: A Bayesian shrinkage model, which accounts for industry-specific effects and uses latent instrumental variables to address CCO endogeneity, shows that CCOs positively influence IPO outcomes.
Abstract: Recognizing that initial public offerings IPOs represent the debut of private firms on the public stage, this study investigates how pre-IPO customer and competitor orientations CCOs affect IPO outcomes. Building on information economics, we propose that CCOs influence investors' sentiments toward an IPO and that both IPO-specific variables which influence the credibility of CCO information and facets of the organizational institutional and task environments which influence the appropriateness of CCO information moderate this influence. We test the framework using data collected from computer-aided text analysis, expert coders, and secondary sources for 543 IPOs across 43 industries between 2000 and 2004. A Bayesian shrinkage model, which accounts for industry-specific effects and uses latent instrumental variables to address CCO endogeneity, shows that CCOs positively influence IPO outcomes. Furthermore, 1 underwriter reputation and venture funding positively moderate the effects of CCOs; 2 technological and market turbulence positively and institutional complexity negatively moderate the effect of customer orientation; and 3 technological turbulence, competitive intensity, and institutional complexity positively moderate the effect of competitor orientation. Also, accounting for endogeneity using latent instrumental variables substantially improves the predictive validity of the model, relative to alternative model specifications.
TL;DR: In this article, a forecasting model that incorporates media-multiplexing behavior of both traditional and new media, their interdependencies, and consumer heterogeneity is proposed, and calibrates the model using a rich database of individual-specific media activity diaries.
Abstract: There is a growing trend among consumers to serially consume small, incomplete “chunks” of multiple media types---television, radio, Internet, and print---within a short time period. We refer to this behavior as media multiplexing and note that key challenges for integrated marketing communications media planners are 1 predicting which media or combination of media their target audience is likely to consume at any given time and 2 understanding potential substitutions and complementarities in their joint consumption. We propose a forecasting model that incorporates media-multiplexing behavior of both traditional and new media, their interdependencies, and consumer heterogeneity, and we calibrate the model using a rich database of individual-specific media activity diaries. The results suggest that accounting for media synergies within a single utility specification significantly improves model forecasts. We also introduce a utility function that directly models cross-channel media complementarities via interactive effects of the satiation parameters of own and joint consumption of various media types. Finally, our individual-level analyses generate unique insights on consumer-level media switching, multiplexing, and individual heterogeneity often ignored in aggregate data.
TL;DR: In this article, the authors examine multilateral bargaining in vertical supply relationships that involve an upstream manufacturer who sells through two competing retailers and show that simultaneous bargaining is optimal for the manufacturer when the retail prices and profitability are similar, and sequential bargaining is preferred when the dispersion in the retail price is sufficiently large.
Abstract: We examine multilateral bargaining in vertical supply relationships that involve an upstream manufacturer who sells through two competing retailers. In these relationships the negotiations are interdependent, and bargaining externality may arise across the retailers. In addition, the timing by which the manufacturer negotiates with the retailers becomes important. In simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel, whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation. We show that simultaneous bargaining is optimal for the manufacturer when the retail prices and profitability are similar, and sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large. As a result of ex post renegotiations, the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price and exclusively supply only the retailer who charged a relatively high retail price and maintained high channel profitability. Moreover, ex post multilateral bargaining can buffer downstream competition and thus lead to positive retail profits even in markets that are close to perfect competition.
TL;DR: A direct utility model with a latent decision sequence for measuring asymmetric effects that allows for differential responses to cross-category purchases and inventories is proposed and implications are explored through counterfactual analyses involving cross-price elasticities and spillover effects of merchandising variables.
Abstract: A symmetric complements refer to goods where one good is more dependent on the other, yet consumers receive enhanced utility from consuming both. Examples include garden hoses and sprinklers, chips and dip, and routine versus personalized services where the former has a broader base for utility generation and the latter is more dependent on the other's presence. Measuring asymmetric effects is difficult when all that is observed are the purchase quantities present in a consumer's market basket. We propose a direct utility model with a latent decision sequence for measuring asymmetric effects that allows us to capture differential responses to cross-category purchases and inventories. Scanner panel data of milk and cereal purchases are used to investigate the presence of asymmetric complementarity, and implications are explored through counterfactual analyses involving cross-price elasticities and spillover effects of merchandising variables.
TL;DR: The results demonstrate the importance of the pattern of links between customers, and not just their number, in determining the profitability of co-creation, and provide a different justification for the use of lead users that depends on their network centrality and not on having lower cost, more information, or greater ability.
Abstract: Co-creation, the participation of customers in the design and production of goods and services, has been gaining popularity in recent years. In this research we incorporate firm pricing into the joint production process allowing us to study 1 production externalities between firm and customers, 2 production externalities among customers, and 3 optimal pricing by firms.
We show that given a choice, a monopoly firm will opt for co-creation with customers rather than deal with passive price-taking consumers. Furthermore, the firm will increase the effort it devotes to co-creation as the number of potential co-creating customers increases.
We show that the profit of a firm facing a centralized pattern of externalities among customers with an expert, or lead user, in the center can be higher than its profit when facing a decentralized pattern of externalities among customers and clearly dominates its profit when customers do not have any cross externalities. Thus, we provide a different justification for the use of lead users, one that depends on their network centrality and not on having lower cost, more information, or greater ability than the firm. Because the decentralized pattern has more links than the centralized pattern, our results demonstrate the importance of the pattern of links between customers, and not just their number, in determining the profitability of co-creation.
Furthermore, we find that the lead user's externality spillover to other connected users, her neighbors, acts as a force multiplier on the efforts exerted by all participants in equilibrium. Specifically, a higher spillover from the lead user increases the efforts of the firm, the neighbors, and the lead user herself, and this may lead to beneficial outcomes for all.
Finally, we show that in co-creation environments, a monopolist firm may benefit by committing to a single price rather than exercising price discrimination. This is because the pricing structure affects customers' incentive to invest effort in the innovation-production stage.
TL;DR: It is argued that uncertainty can be partially resolved through social learning processes that occur naturally and emanate from local neighborhood characteristics, and that neighborhood social capital, i.e., the propensity for neighbors to trust each other and communicate with each other, enhances the social learning process and makes it more efficient.
Abstract: Social learning can occur when information is transferred from existing customers to potential customers. It is especially important when the information that is conveyed pertains to experience attributes, i.e., attributes of products that cannot be fully verified prior to the first purchase. Experience attributes are prevalent and salient when consumers shop through catalogs, on home shopping networks, and over the Internet. Firms therefore employ creative and sometimes costly methods to help consumers resolve uncertainty; we argue that uncertainty can be partially resolved through social learning processes that occur naturally and emanate from local neighborhood characteristics. Using data from Bonobos, a leading U.S. online fashion retailer, we find not only that local social learning facilitates customer trial but also that the effect is economically important because about half of all trials were partially attributable to it. Merging data from the Social Capital Community Benchmark Survey, we find th...
TL;DR: It is found that advertising content may be effective in inducing search even if incentives for misrepresentation exist, and it is shown that the extent to which misrepresentation can take place increases with the cost of advertising coverage.
Abstract: I consider a cheap-talk model in which a firm has a chance to communicate its product quality to consumers. The model describes how advertising can be both informative to consumers and profitable for the firm through its content in a vertically differentiated market. I find that advertising content may be effective in inducing search even if incentives for misrepresentation exist. In particular, a firm with an undesirable low-quality product is able to attract consumers who would have not incurred a search cost had they known its true quality. In this case, a semiseparating equilibrium occurs where the lowest firm types pool upward in order to increase the expected product quality while simultaneously signaling that the product is affordable. Although consumers always benefit from truth in advertising, total welfare may decrease if an undesirable firm is required to reveal its type. Finally, I show that the extent to which misrepresentation can take place increases with the cost of advertising coverage.
TL;DR: The role that consumer valuation of used products plays in shaping a manufacturer's incentive to offer a returns policy option to a retailer when used goods might be devalued compared to new ones as a result of physical deterioration or obsolescence is studied.
Abstract: Many durable products with relatively short selling seasons have been using returns policies between manufacturers and retailers as the contractual protocol for some time. Recently, these sectors have witnessed the growing popularity of peer-to-peer Web-based used goods markets as important transaction channels between buyers and sellers. Given that these two issues are critically linked from both supply and demand perspectives, in this paper we study the role that consumer valuation of used products plays in shaping a manufacturer's incentive to offer a returns policy option to a retailer when used goods might be devalued compared to new ones as a result of physical deterioration or obsolescence. We do so through a two-period dyadic channel framework where the retailer faces uncertain demand for a durable product from a renewable set of customers who are impatient but forward looking. The manufacturer, on the other hand, needs to decide whether or not to offer a returns contract to the retailer. We first characterize the necessary and sufficient condition under which a returns contract is the equilibrium strategy as well as the corresponding channel decisions. Further analysis of this condition reveals that a higher consumer valuation of used products increases the likelihood of a returns contract being the equilibrium strategy. This result seems to be robust except when the potential demands for the two periods are quite deterministic and uncorrelated. However, it contradicts the burgeoning managerial trend to replace returns contracts with price-only ones in sectors where used goods are valued relatively highly by the consumers. We also discuss how used goods markets affect the equilibrium channel decisions as well as how demand uncertainty and logistics costs associated with returns influence the equilibrium contracting strategy.
TL;DR: It is found that the consistency between the two brand images, the innovativeness of the product, and the exclusivity of the Cobranding relationship significantly increase the market reaction to cobranding announcements.
Abstract: We examine whether cobranding—the practice of using two established brand names on the same product— increases the market value of parent firms. Using data from the consumer packaged goods industry, we document that the average stock market reaction to the announcement of cobranded new products is approximately C1.0%. We hypothesize that this reaction is significantly higher than it would have been if these same products were single branded, and we find evidence consistent with this hypothesis. We also examine the determinants of this stock market reaction. We find that the consistency between the two brand images, the innovativeness of the product, and the exclusivity of the cobranding relationship significantly increase the market reaction to cobranding announcements. Our findings provide important managerial guidelines for enhancing firm value through cobranding partnerships.
TL;DR: In this paper, the authors developed an implementable and scalable assortment optimization method that allows for theory-based substitution patterns and optimizes real-life, large-scale assortments at the store level.
Abstract: Retailers face the problem of finding the assortment that maximizes category profit. This is a challenging task because the number of potential assortments is very large when there are many stock-keeping units SKUs to choose from. Moreover, SKU sales can be cannibalized by other SKUs in the assortment, and the more similar SKUs are, the more this happens. This paper develops an implementable and scalable assortment optimization method that allows for theory-based substitution patterns and optimizes real-life, large-scale assortments at the store level. We achieve this by adopting an attribute-based approach to capture preferences, substitution patterns, and cross-marketing mix effects. To solve the optimization problem, we propose new very large neighborhood search heuristics. We apply our methodology to store-level scanner data on liquid laundry detergent. The optimal assortments are expected to enhance retailer profit considerably 37.3%, and this profit increases even more to 43.7% when SKU prices are optimized simultaneously.
TL;DR: In this paper, the authors proposed the Audience Value Maximization Algorithm (AVMA), which considers many possible advertisement orderings within a dynamic programming framework with a strategy-proof pricing mechanism.
Abstract: When a television advertisement causes viewers to switch channels, it reduces the audience available to subsequent advertisers. This audience loss is not reflected in the advertisement price, resulting in an audience externality. The present article analyzes the television network's problem of how to select, order, and price advertisements in a break of endogenous length in order to correct audience externalities. It proposes the Audience Value Maximization Algorithm (AVMA), which considers many possible advertisement orderings within a dynamic programming framework with a strategy-proof pricing mechanism. Two data sets are used to estimate heterogeneity in viewer-switching probabilities and advertiser willingness-to-pay parameters in order to evaluate the algorithm's performance. A series of simulations shows that AVMA typically maximizes audience value to advertisers, increases network revenue relative to several alternatives, and runs quickly enough to implement.
TL;DR: Overall, athletic success has a significant, long-term goodwill effect on future applications and quality, however, students with lower-than-average SAT scores tend to have a stronger preference for athletic success, whereas students with higher SAT scores have a greater preference for academic quality.
Abstract: I measure the spillover effect of intercollegiate athletics on the quantity and quality of applicants to institutions of higher education in the United States---an effect popularly known as the “Flutie effect.” I treat athletic success as a stock of goodwill that decays over time, similar to that of advertising. A major challenge is that privacy laws prevent us from observing information about the applicant pool. I overcome this challenge by using order statistic distribution to infer applicant quality from information on enrolled students. Using a flexible random-coefficients aggregate discrete choice model that accommodates heterogeneity in preferences for school quality and athletic success, as well as an extensive set of school fixed effects to control for unobserved quality in athletics and academics, I estimate the impact of athletic success on applicant quality and quantity. Overall, athletic success has a significant, long-term goodwill effect on future applications and quality. However, students with lower-than-average SAT scores tend to have a stronger preference for athletic success, whereas students with higher SAT scores have a greater preference for academic quality. Furthermore, the decay rate of athletics' goodwill is significant only for students with lower SAT scores, suggesting that the goodwill created by intercollegiate athletics resides more extensively with lower-scoring students than with their higher-scoring counterparts. But, surprisingly, athletic success impacts applications even among academically stronger students.
TL;DR: It is shown that an interplay between competition-related and demand-related considerations is what allows trueware to emerge as an equilibrium in the absence of any ex post cost to engaging in vaporware.
Abstract: A firm may want to preannounce its plans to develop a new product in order to stimulate future demand. But given that such communications can affect rivals' incentives to develop the same new product, a firm may decide to preannounce untruthfully in order to deter competitors. We examine an incumbent's preannouncement strategy when there is uncertainty regarding the commercial viability of a new product opportunity and a threat of rival entry. Each firm has a private assessment of the market potential for the new product. Two competitive incentives arise for the incumbent in terms of discouraging rival entry: it can use preemptive communication or it can remain silent and instill a pessimistic market potential outlook. We find that an incumbent prefers to follow a vaporware strategy---i.e., declares plans to pursue a new product opportunity even when it may have no development intentions---when its market forecasting capabilities are weak and the demand-side benefits from preannouncing are small. By contrast, when the incumbent has strong market forecasting capabilities and the demand-side benefits are small, the incumbent adopts a suddenware strategy---i.e., remains silent about its new product plans even when it actually plans to develop the new product. Finally, when its market forecasting capabilities are strong and the demand-side benefits are large, the incumbent prefers to engage in a trueware strategy---i.e., truthfully preannounces development plans. We show that an interplay between competition-related and demand-related considerations is what allows trueware to emerge as an equilibrium in the absence of any ex post cost to engaging in vaporware. In an extension, we let the incumbent's actual development plans leak out and allow the entrant to wait and learn those plans prior to setting a research and development level. We identify conditions for the entrant to postpone development despite the risk of being late to market, as well as conditions for the entrant to commence development immediately despite not knowing the incumbent's plans based on the observed preannouncement strategy.
TL;DR: Alternative ways to price discriminate are evaluated while accounting for both revenues and tariff management costs, revealing a counterintuitive insight that more-complex tariffs need not always be more profitable; it matters whether the complexity is from many choices or more pricing instruments.
Abstract: Firms that serve a large market with many diverse consumer types use discriminatory or nonlinear pricing to extract higher revenue, inducing consumers to separate by self-selecting from a large number of tariff options. But the extent of price discrimination must often be tempered by the high costs of devising and managing discriminatory tariffs, including costs of supporting consumers in understanding and making selection from a complex menu of choices. These tariff design trade-offs occur in many industries where firms face many consumer types and each consumer picks the number of units to consume over time. Examples include wireless communication services, other telecom and information technology products, legal plans, fitness clubs, automobile clubs, parking, healthcare plans, and many services and utilities. This paper evaluates alternative ways to price discriminate while accounting for both revenues and tariff management costs. The revenue-maximizing menu of quantity-price bundles can be very or infinitely large and hence not practical. Instead, two-part tariffs 2PTs, which charge a fixed entry fee and a per-unit fee, can extract a large fraction of the optimal revenue with a small menu of choices, and they become more attractive once the costs of tariff management are factored in. We show that three-part tariffs 3PTs, which use an additional instrument, the “free allowance,” are an even more efficient way to price discriminate. A relatively small menu of 3PTs can be more profitable than a menu of 2PTs of any size. This 3PT menu can be designed with less information about consumer preferences relative to the menu of two-part tariffs, which, in order to segment customers optimally, needs fine-grained information about preferences. Our analysis reveals a counterintuitive insight that more-complex tariffs need not always be more profitable; it matters whether the complexity is from many choices or more pricing instruments.