A Price Discrimination Theory of Coupons

The objective of this paper is to analyze the consumer's decision in electing to use cents-off coupons distributed by manufacturers of consumer products. Arguing that the decision to use coupons is based on the tradeoff between costs of using coupons and the savings obtained, it is shown that coupons can serve as a price discrimination device to provide a lower price to a particular segment of consumers. Based on a price theoretic model, it is shown that the users of coupons are more price elastic than nonusers of coupons and that the opportunity cost of time and other household resource variables are determinant factors in consumers' decisions. Implications derived from the model are tested using diary panel data.price-discrimination, cents-off coupons, theory testing

The Inverse Relationship Between Manufacturer and Retailer Margins: A Theory

Our objective in this paper is to explain the relationship between a manufacturer's brand advertising and its impact on wholesale and retail margins in consumer goods markets. We construct a model of re-tailers and manufacturers, and using tools from game theory explain why under some conditions a manufacturer's advertising can squeeze, i.e., lower, the retail margin while simultaneously increasing the wholesale margin. Our paper should be of interest to applied analytical and empirical researchers in marketing as well as managers interested in understanding the strategic impact of brand advertising on margins. The consumer goods retail market is characterized by intense rivalry among retailers competing for a share of the consumer dollar. Retailers carry many products, and on any given purchase occasion a typical consumer buys a subset of the vast number of items a retailer has on its shelf. In general consumers are ignorant about the prices of all the products they want to buy and consequently select a retailer to shop at based on the advertised prices of a subset of the products they intend to buy. Given this, retailers tend to compete more aggressively based on the prices of a selected set of items by advertising these prices to consumers. The items that the retailers select to compete on are those that most consumers desire and value highly. Since the profit from any customer is the sum of profits from advertised and unadvertised items, the intensity of retail competition, as evident from the prices of these items, increases with the amount the consumer will expend on the unadvertised items once at the store. This aggressiveness therefore translates into lower retail margins on these selected items since the retailers expect that consumers, once inside a store, will buy non-advertised products as well on which the retailers make money. Thus manufacturers who are more adept at using “pull” strategies to enhance the popularity of their product, obtain d significant competitive advantage vis à vis others. The positioning of the product and the image conveyed through advertising act as drivers in creating this advantage which results in higher wholesale prices that these manufacturers can charge the retailers. There are several key insights from our analysis. Our model explains why retail and wholesale margins can move in opposite directions and also suggests when—in those retail markets where consumers shop for a basket of goods. Our analysis also reveals that retailers make higher margins on unadvertised products and less on advertised products. Furthermore it shows the power of a popular brand where its popularity can be enhanced through brand advertising. From a managerial standpoint we also show that the effectiveness of advertising should not be narrowly interpreted in terms of increase in share or awareness but should include the ability to charge a higher wholesale price. Finally our analysis sheds light on extant, and provides guidance to future, empirical work in this area.advertising, wholesale and retail margins, channel competition

Market Entry Strategy Under Firm Heterogeneity and Asymmetric Payoffs

How should a firm decide whether or not to enter an untested market when a competing firm is vying for the same market? Should a firm always speed to the market in an effort to capitalize on pioneering advantages? We address those questions by developing a simple game-theoretical model that captures the most essential factors in a firm's market entry decision, such as market uncertainty, firm heterogeneity, competition, cannibalization, and order-of-entry effects. Our analysis shows that in a competitive context, both pioneering advantages and laggard's disadvantages can motivate a firm to speed to an untested market. Therefore, pioneering advantages alone are not an adequate guide for a firm to formulate its market entry strategy. The optimal decision may call for a firm to be a prudent laggard when pioneering advantages to the firm are substantial, or to become a market pioneer when facing pioneering disadvantages. We characterize different patterns of market entry as equilibrium outcomes for different configurations of the market reward structure and offer a conceptual framework for formulating market entry strategies that go beyond the conventional dichotomy: or . We show that the paradoxical phenomenon of “disadvantaged pioneers” can arise in a competitive context as the outcome of rational firms making rational choices. To show that pioneering advantages alone are not the right litmus test for market entry decisions, we apply our general framework to a concrete case where consumer preference or the premium that consumers are willing to pay for the pioneering brand gives rise to pioneering advantages and laggard's disadvantages. We conclude that the firm with a larger pioneering premium may choose to wait, while a firm with a smaller pioneering premium speeds to the market. Our analysis also sheds light on empirical research on pioneering advantages. Because firms may race into a market solely to avoid laggard's disadvantages rather than to capture pioneering advantages, pioneers are not necessarily the firms best positioned to establish, exploit, and maintain pioneering advantages. Therefore, it is not surprising that a significant percentage of pioneers fail, as documented by recent empirical research. Our normative investigation further suggests that this predicament in empirical research will not disappear even if we have complete data, use the right measurements, and employ perfect statistical techniques. Therefore, it is perhaps more fruitful to redirect our research effort in the search for pioneering advantages. Finally, we extend our analysis to incorporate the effect of cannibalization on an incumbent firm's market entry strategy. We conclude that cannibalization can motivate an incumbent firm to wait, as the conventional wisdom suggests, but it can also be an impetus for a firm to become a market pioneer. We offer supporting evidence for our analysis and discuss managerial implications of our conclusions.New Product Entry, Competitive Strategy

Private Labels and the Channel Relationship: A Cross-Category Analysis.

Retailers introduce private labels in a category not only to gain profits directly from the private label but also to use as a strategic weapon to elicit concessions from the national brand manufacturers. The authors show that, in certain categories, the retailer can gain better terms of trade by introducing a private label. The ability of the retailer to use the private label for this purpose is hypothesized to be inversely related to the risks consumers associate with purchasing in that category. The implications of the authors' model are supported by data from a cross section of grocery categories. Copyright 1998 by University of Chicago Press.

Demand uncertainty and three-part tariffs

NUS Business School Research Paper Series; 2011-0101-2

Markov chain monte carlo and models of consideration set and parameter heterogeneity

In this paper the authors propose an integrated consideration set-brand choice model that is capable of accounting for the heterogeneity in consideration set and in the parameters of the brand choice model. The model is estimated by an approximation free Markov Chain Monte Carlo sampling procedure and is applied to a scanner panel data. The main findings are: ignoring consideration set heterogeneity under-states the impact of marketing mix and overstates the impact of preferences and past purchase feedback even when heterogeneity in parameters is modeled; the estimate of consideration set heterogeneity is robust to the inclusion of parameter heterogeneity; when consideration set heterogeneity is included the parameter heterogeneity takes on considerably less importance; the promotional response of households depends on their consideration set even if the underlying choice parameters are identical