Informative advertising with discretionary search

We examine a market for a search good in which consumers are uncertain about the firm’s product quality, but may search to gather information before buying. We show that credible information can be conveyed to consumers even when the firm faces a market with little or no preference heterogeneity. Rather, differences in willingness-to-pay arise from the endogenous search decisions by consumers. A fundamental assumption is that search is not required for purchase and consumers may bypass it altogether. In this case search induces a dispersion in preferences that is detrimental for the firm’s ability to capture value. This provides an incentive for the firm not to overstate its quality. When quality is common knowledge (but product fit is uncertain before search), increases in quality lead to a higher market price, but firm profits and consumer surplus are non-monotonic because of changes in the search regime. In particular if quality is high enough for search to be worthwhile the firm faces downward pressure in prices and consumers become better off. These effects reverse at higher levels of product quality. Surprisingly, when product quality is unknown but credible information is available consumers become worse off with the probability of facing a high type firm, because this firm prefers to target high value consumers and not serve those who do not find that the product fits their needs.preprintinpres

Prepurchase information acquisition and credible advertising

Consumers can decide whether to acquire more information about their valuations prior to purchase. In this paper, we examine pricing and advertising strategies when consumers can engage in prepurchase information acquisition. We show that consumer information acquisition can increase valuation heterogeneity and undermine a firm’s ability to extract consumer surplus. As a result, interestingly, a higher product quality can exert a nonmonotonic impact on equilibrium information acquisition, hurt firm profitability, and lead to lower consumer surplus. We also demonstrate that prepurchase information acquisition can be an endogenous mechanism to enable credible advertising in a cheap-talk setting. We show that quality claims in advertisements can be informative even when the firm can freely misrepresent its advertising message. Informative advertising can arise because a higher perceived quality can not only increase consumers’ expected value, but it also induces more information acquisition and thus hurts the firm’s ability to extract consumer surplus. This novel explanation for the credibility of cheap-talk advertising is distinguished from those identified in the literature (e.g., matching between firm types and heterogenous consumers, restrictive communication on multidimensional attributes). Moreover, we show that a higher quality can soften competition by inducing more information acquisition, thus benefiting the rival firm’s profitability.authorsversionpublishe

Dynamic effects of price promotions: field evidence, consumer search, and supply-side implications

© 2018, Springer Science+Business Media, LLC, part of Springer Nature.This paper investigates the dynamic effects of price promotions in a retail setting through the use of a large-scale field experiment varying the promotion depths of 170 products across 17 categories in 10 supermarkets of a major retailer in Chile. In the intervention phase of the experiment, treated customers were exposed to deep discounts (approximately 30%), whereas control customers were exposed to shallow discounts (approximately 10%). In the subsequent measurement phase, the promotion schedule held discount levels constant across groups. We find that treated customers were 22.4% more likely to buy promoted items than their control counterparts, despite facing the same promotional deals. Strikingly, the magnitude of the dynamic effects of price promotions (when promotional depths are equal across conditions) is 61% of the promotional effects induced by offering shallow vs. deep discounts during the interventio