Print Advertisement Characteristics and Apple Variety Attraction: A Mimic Model Approach

A structural latent variable model of apple variety demand is used to analyze the effect of variety specific newspaper advertisement characteristics on variety attraction (preferences), and in turn on variety demand. The influence of advertisement size, the use of color and the Washington apple logo were analyzed. The estimated variety attraction variable is important in explaining demand. Model specifications which exclude this variable tend to understate demand elasticities. Advertisement size has a positive impact on Granny Smith, Fuji, and Gala sales. Red Delicious sales are positively influenced by color ads, but negatively affected by ads with the Washington apple logo.Apple demand, newspaper advertisements, structural latent variable model, Marketing,

Price Discrimination and Fairness Concerns

We analyze the profitability of third degree price discrimination under consideration of consumers' fairness concerns within an experiment and explain the results within a theoretical framework. We find that with an increase in the price differential negative reciprocal reactions by disadvantaged consumers become stronger compared to positive reciprocal reactions by advantaged consumers. Consequently, the profit maximizing price differential lies below the one predicted to be optimal by standard theory. Further, profitability increases when consumers who are regarded as poorer are charged lower prices compared to when the wealth of the different consumer groups is unknown

Essays on the Impact of Social and Psychological Factors on Strategic Firm Decisions

Traditional economic analysis assumes that consumers are fully rational and consumer preferences are independent of consumers’ social context. Research has shown ample evidence that consumer preferences may vary by the social context of consumption, and social and psychological factors influence consumers’ decision making. This dissertation examines the effects of social and psychological factors on consumers’ decision making and how firms make strategic product and pricing decisions to respond to these effects. In the first chapter of the dissertation, I examine how firms selling repeated-purchased products price discriminate consumers based on consumers’ purchase history data, given that consumers are concerned about price fairness. In the second chapter, I examine how firms selling durable goods introduce product upgrades, given that consumers’ utility from consuming a product depends on the relative standing of the product in the marketplace. In the third chapter, I examine how firms selling status products make the design differentiation decision for their product lines, given that product design reveals consumers’ social group and consumers have status considerations. In the above research, I provide qualitatively new insights on the impact of psychological and social factors on firms’ strategic decisions and offer important implications for managers and public policy makers

Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs

The so called flat-rate bias is a well documented phenomenon caused by consumers' desire to be insured against fluctuations in their billing amounts. This paper shows that expectation-based loss aversion provides a formal explanation for this bias. We solve for the optimal two-part tariff when contracting with loss-averse consumers who are uncertain about their demand. The optimal tariff is a flat rate if marginal cost of production is low compared to a consumer's degree of loss aversion and if there is enough variation in the consumer's demand. Moreover, if consumers differ with respect to the degree of loss aversion, firms' optimal menu of tariffs typically comprises a flat-rate contract

Modeling the Psychology of Consumer and Firm Behavior with Behavioral Economics

Marketing is an applied science that tries to explain and influence how firms and consumers actually behave in markets. Marketing models are usually applications of economic theories. These theories are general and produce precise predictions, but they rely on strong assumptions of rationality of consumers and firms. Theories based on rationality limits could prove similarly general and precise, while grounding theories in psychological plausibility and explaining facts which are puzzles for the standard approach. Behavioral economics explores the implications of limits of rationality. The goal is to make economic theories more plausible while maintaining formal power and accurate prediction of field data. This review focuses selectively on six types of models used in behavioral economics that can be applied to marketing. Three of the models generalize consumer preference to allow (1) sensitivity to reference points (and loss-aversion); (2) social preferences toward outcomes of others; and (3) preference for instant gratification (quasi-hyperbolic discounting). The three models are applied to industrial channel bargaining, salesforce compensation, and pricing of virtuous goods such as gym memberships. The other three models generalize the concept of gametheoretic equilibrium, allowing decision makers to make mistakes (quantal response equilibrium), encounter limits on the depth of strategic thinking (cognitive hierarchy), and equilibrate by learning from feedback (self-tuning EWA). These are applied to marketing strategy problems involving differentiated products, competitive entry into large and small markets, and low-price guarantees. The main goal of this selected review is to encourage marketing researchers of all kinds to apply these tools to marketing. Understanding the models and applying them is a technical challenge for marketing modelers, which also requires thoughtful input from psychologists studying details of consumer behavior. As a result, models like these could create a common language for modelers who prize formality and psychologists who prize realism

Price Discrimination and Fairness Concerns

We analyze the profitability of third degree price discrimination under consideration of consumers' fairness concerns within an experiment and explain the results within a theoretical framework. We find that with an increase in the price differential negative reciprocal reactions by disadvantaged consumers become stronger compared to positive reciprocal reactions by advantaged consumers. Consequently, the profit maximizing price differential lies below the one predicted to be optimal by standard theory. Further, profitability increases when consumers who are regarded as poorer are charged lower prices compared to when the wealth of the different consumer groups is unknown.price discrimination; reciprocal fairness; inequity aversion; experimental economics

Uncertain demand, consumer loss aversion, and flat-rate tariffs

We consider a model of firm pricing and consumer choice, where consumers are loss averse and uncertain about their future demand. Possibly, consumers in our model prefer a flat rate to a measured tariff, even though this choice does not minimize their expected billing amount—a behavior in line with ample empirical evidence. We solve for the profit-maximizing two-part tariff, which is a flat rate if (a) marginal costs are not too high, (b) loss aversion is intense, and (c) there are strong variations in demand. Moreover, we analyze the optimal nonlinear tariff. This tariff has a large flat part when a flat rate is optimal among the class of two-part tariffs.Consumer loss aversion, flat-rate tariffs, nonlinear pricing, uncertain demand

Optimal Effort in Consumer Choice: Theory and Experimental Evidence for Binary Choice

This paper develops a theoretical model of optimal effort in consumer choice.The model extends previous consumer choice models in that the consumer not only chooses a product, but also decides how much effort to apply to a given choice problem.The model yields a unique optimal level of effort, which depends on the consumer's cost of effort, the expected utility gain of a correct choice, and the complexity of the choice set.We show that the relationship between effort and cost of effort is negative, whereas the relationships between effort and product utility difference and choice task complexity are undetermined.To resolve this theoretical ambiguity and to explore our model empirically, we investigate the relationships between effort and cost of effort, product utility difference and choice task complexity using data from a conjoint choice study of two-alternative consumer restaurant choices.Response time is used as a proxy for effort and consumer involvement measures capture individual differences in (relative) cost of effort and perceived complexity.Effort is explained using the (estimated) utility difference between alternatives, the number of elementary information processes (EIP's) required to solve the choice problem optimally and respondent specific cost of effort and complexity perceptions.The predictions of the theoretical model are supported by our empirical findings.Response time increases with lower cost of effort and greater perceived complexity (i.e. higher involvement).We find that across the range of choice tasks in our survey, effort increases linearly with smaller product utility differences and greater choice task complexity.consumer choice;bounded rationality

Reference Dependence and Market Competition

This paper studies the implications of consumer reference dependence in market competition. If consumers take some product (e.g., the first product they have considered) as the reference point in evaluating others and exhibit loss aversion, then the more "prominent" firm whose product is taken as the reference point by more consumers will randomize its price over a high and a low one. All else equal, this firm will on average earn a larger market share and a higher profit than its rival. The welfare impact is that consumer reference dependence could harm firms and benefit consumers by intensifying price competition. Consumer reference dependence will also shape firms' advertising strategies and quality choices. If advertising increases product prominence, ex ante identical firms may differentiate their advertising intensities. If firms vary in their prominence, the less prominent firm might supply a lower-quality product even if improving quality is costless.