(De)marketing to Manage Consumer Quality Inferences

Savvy consumers attribute a product’s market performance to its intrinsic quality as well as the seller’s marketing push. The authors study how sellers should optimize their marketing decisions in response. They find that a seller can benefit from “demarketing” its product, meaning visibly toning down its marketing efforts. Demarketing lowers expected sales ex ante but improves product quality image ex post, as consumers attribute good sales to superior quality and lackluster sales to insufficient marketing. The authors derive conditions under which demarketing can be a recommendable business strategy. A series of experiments confirm these prediction

Information Provision in a Vertically Differentiated Competitive Marketplace

This paper examines the interaction of information provision, product quality, and pricing decisions by competitive firms to explore the following question: in a competitive market where consumers face uncertainty about product quality and/or their preference for quality, which firms—those that sell higher- or lower-quality products—have the higher incentive to provide what type of information? We find that while the higher-quality firm should always provide information resolving consumer uncertainty on product quality, the lower-quality firm under certain conditions will have the higher incentive to and will be the one to provide information resolving consumer uncertainty about their quality preferences. In the analysis, we trace the latter result to competition and to free-riding on the information provision. Specifically, in a monopoly market or when consumer free-riding is restricted by the costliness of store visits, the lower-quality firm would have a lower incentive to provide information resolving consumer preference uncertainty than otherwise. The model is also adapted to examine product returns as a possible strategy of information provision.uncertainty, information, competitive strategy, service, free-riding, game theory, product returns

Research Note—The Effects of Costs and Competition on Slotting Allowances

We consider the optimal two-part tariff contract between a manufacturer and a retailer. We show that retail competition (in the presence of either fixed costs or bargaining power) may lead to slotting allowances in an optimal contract, even with a monopoly manufacturer and no information asymmetry. On the other hand, slotting allowances do not arise with a monopoly retailer and no information asymmetry, whether the manufacturer is a monopoly or not. We also show that more intense retail competition, higher retail bargaining power, larger retailer fixed costs, lower marginal costs of retailing, as well as larger relative retailer size (whether coming from a location or operating advantage), have a positive impact on the incidence and the magnitude of slotting allowances. The opposing effects of the fixed and marginal operating costs on slotting allowances, as well as the impact of competition and bargaining power on profits, underscore the importance of careful definitions of these variables in empirical research.slotting allowances, bargaining power, distribution channels, channel coordination, competition, pricing, retailing, wholesaling

Pricing, Frills, and Customer Ratings

This paper explores whether and how a firm should adapt its strategy in view of consumer use of prior customer ratings. Specifically, we consider optimal pricing and whether the firm should offer an unexpected frill to early customers to enhance their product experiences. We show that if price history is unobserved by consumers, a forward-looking firm should always modify its strategy from single-period optimal one, but it may be optimal to do so by lowering price, by lowering price and offering frills, or by raising price and offering frills, depending on the market growth rate. Specifically, the last strategy becomes optimal when market growth rate is high enough. The results are similar when the price history is observed by consumers, except that no deviation from single-period profit maximization choices is optimal when market growth is low enough. We also analyze whether the firm should prefer that the price information be stated in or left out of consumer reviews. In addition, in considering the effects of consumer heterogeneity, we conclude that the optimal firm's effort to affect ratings is higher when the idiosyncratic part of consumer uncertainty is larger.game theory, product augmentation, customer satisfaction, uncertainty, forward-looking behavior, pricing, customer ratings