Impact of Returns Policies and Group-Buying On Channel Coordination

This dissertation investigates the role of two marketing practices—returns policies and group-buying services—in improving channel coordination. The first study (presented in Chapter Two) focuses on the interaction between two types of returns policies—returns of unwanted products from consumers to retailers and returns of unsold inventory from retailers to manufacturers. Even without the right to return unsold inventory to the manufacturer, the retailers may accept returns from consumers; by doing so, they benefit from a less pricesensitive market demand, an ability to screen for high-valuation consumers, and a competitive advantage (offering a returns policy makes a retailer more attractive to consumers). From the manufacturer\u27s perspective, accepting returns may induce the retailers to order more stock, set lower prices, generate more sales, and therefore, improves the performance of the channel. However, under some conditions (e.g., when the marginal cost of stock-outs is relatively high), this study shows that this effect disappears and the manufacturer does not accept returns from the retailer in equilibrium. The second study (presented in Chapter Three) investigates the rationale for using group-buying services vis-a-vis the traditional posted-pricing mechanism. It focuses on the behavior of consumers and explores the role of heterogeneity in their valuation for the product and cost of purchasing via group-buying in the functioning of group-buying services as a price-discrimination device. Finally, the role of group-buying services in improving channel coordination under asymmetric information is studied in Chapter Four. This analysis shows that the availability of group-buying services provides an opportunity for the manufacturer to reduce the informational rents of the retailer arising from its private information about the market condition. Interestingly, the manufacturer can avoid paying these rents and regains the first-best profitability when asymmetry in information exists regarding the relative sizes of consumer segments. In other settings (e.g., when asymmetric information exists regarding consumers\u27 price sensitivity), leveraging the group-buying mechanism nevertheless allows the manufacturer to design a contract that requires lower rents and improves channel coordination to some extent

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

Dynamic Demand and Pricing Strategy in the E-Book Market

E-reading has experienced rapid growth in the past few years and has raised new questions. On the supply side, retailers such as Amazon jointly sell e-readers and e-books. It remains unclear how they can coordinate the two products to conduct intertemporal price discrimination (IPD). On the demand side, it remains unclear how much of e-book sales come from cannibalizing print books and how much serve as market expansion to the book business. I empirically address these questions using individual-level data from 2008 to 2012. I estimate a dynamic structural model of consumer e-reader adoption and subsequent book purchases, including quantity, reading format (e-book or print book), and retailer choices (Amazon, other online retailers, or offline bookstores) in a number of book genres. The estimation reveals two consumer types, avid readers and general readers, who self-select into buying e-readers based on their unobserved heterogeneous book tastes. Compared with general readers, avid readers buy more books, adopt e-readers earlier, and have larger cannibalization rates. The two types also have different relative demand elasticities between e-readers and e-books. Given the estimated demand system, I simulate the optimal dynamic pricing strategies of e-readers and e-books for the monopolist retailer Amazon who faces forward-looking consumers. I find that Amazon should harvest on e-readers and invest in e-books. Complementarity provides the firm a novel dimension of consumer heterogeneity (the relative demand elasticities between e-readers and e-books) to exploit. The joint IPD strategy provides a better screening device for more profitable consumers and limits consumer\u27s ability to intertemporally arbitrage. To evaluate the impact of e-books on print book sales, I simulate the world without e-books and compare it with the observed one. I find that 42% of e-book sales come from cannibalizing print book sales and that 58% come from market expansion. Of the cannibalization effect, offline bookstores bear 53% of the cannibalization loss, while Amazon bears 32% and other online retailers bear 15%. I further explore how the impact of e-books would change under alternative pricing arrangements. Overall, the results have managerial implications to publishers, book retailers, and policymakers in the e-book market

Are Consumers Fooled by Discounts? An Experimental Test in a Consumer Search Environment

In this paper we investigate experimentally if people search optimally and how price promotions influence search behavior. We implement a sequential search task with exogenous price dispersion in a baseline treatment and introduce discounts in two experimental treatments. We find that search behavior is roughly consistent with optimal search but also observe some discount biases. If subjects don't know in advance where discounts are offered the purchase probability is increased by 19 percentage points in shops with discounts, even after controlling for the benefit of the discount and for risk preferences. If consumers know in advance where discounts are given then the bias is only weakly significant and much smaller (7 percentage points).Consumer Search Theory, Search Cost, Price Promotion

Omnichannel Retail Operations with Buy-Online-and-Pick-up-in-Store

Many retailers have recently started to offer customers the option to buy online and pick up in store (BOPS). We study the impact of the BOPS initiative on store operations. We build a stylized model where a retailer operates both online and offline channels. Customers strategically make channel choices. The BOPS option affects customer choice in two ways: by providing real-time information about inventory availability and by reducing the hassle cost of shopping. We obtain three findings. First, not all products are well suited for in-store pickup; specifically, it may not be profitable to implement BOPS on products that sell well in stores. Second, BOPS enables retailers to reach new customers, but for existing customers, the shift from online fulfillment to store fulfillment may decrease profit margins when the latter is less cost effective. Finally, in a decentralized retail system where store and online channels are managed separately, BOPS revenue can be shared across channels to alleviate incentive conflicts; it is rarely efficient to allocate all the revenue to a single channel

Interactive bundle pricing strategy for online pharmacies

Online retail pharmacies usually price their products differently from traditional drugstores. Based on real-time consumer behaviors, this paper proposes a dynamic bundle pricing strategy to maximize the pharmacy's profit. Given free shipping thresholds and consumer budgets, we propose a mixed-integer nonlinear programming model and a heuristic to sequentially price customized bundles. We further conduct a numerical study using the data from a leading e-pharmacy in China. Our computational results indicate that the proposed model not only improves the e-pharmacy's profit by attracting more customers but noticeably contributes to consumer surplus. Through sensitivity analysis, our model is proved to be robust under various scenarios.</p

Essays in nonlinear pricing

This dissertation addresses several open issues in the economics surrounding the use of nonlinear pricing. The first chapter empirically examines the impact of the use of nonlinear pricing by wholesalers. The second chapter evaluates how firm profit depends on the number of prices offered in a nonlinear price schedule. Finally, the third chapter investigates the use of all-unit discounts as a price discrimination instrument. The first chapter exploits a unique data set of price schedules to provide the first empirical estimate of the welfare impact of second degree price discrimination in a market with double marginalization. Theoretical predictions in such a context are ambiguous. Quantity discounts at the wholesale level reduce costs for larger retailers, increasing efficiency. However, quantity discounts raise input costs for smaller retailers, increasing prices consumers may pay. The combined welfare effects on consumers depends on how much of input cost discounts are passed through to consumers and the distribution of retailer size. I develop and estimate a model of the New York State retail liquor market where wholesalers offer a multi-part nonlinear tariff for each product. The structural model is then used to estimate the welfare impact of restricting wholesale pricing to be linear. I find that banning quantity discounts reduces total welfare by approximately 14% on average. Consumer surplus and wholesaler profit decline by approximately 26% on average. Average retailer profit increases by a similar magnitude, though effects for a particular retailer are heterogeneous across retailer size. The second chapter examines the shape of observed price schedules more directly. Sellers often offer price schedules with relatively few segments rather than completely nonlinear price schedules which offer a unique price for each unit sold. By not offering a completely nonlinear, sellers are foregoing some additional profit in favor of a simpler pricing strategy. I find that the scale of these foregone profits is relatively small and only loosely related to product characteristics. When considered in percentage terms, foregone profits are very similar across a large number of products. This suggests that simple pricing strategies obtain almost all the profits available and this is a common property of nonlinear pricing strategies. The final chapter compares price discrimination through two different quantity discount mechanisms: all-unit discounts and incremental discounts. All-unit-discounts give consumers a lower marginal price on all units purchased once total purchase size crosses a threshold. Incremental discounts only provide discounts on units above the threshold. Relative to incremental discounts, all-unit-discounts imply higher marginal prices and bunching of purchase sizes in equilibrium. The equilibrium bunching may present a challenge for estimating the model empirically.Economic