Are we strategically naïve or guided by trust and trustworthiness in cheap-talk communication?

Cheap-talk communication between parties with conflicting interests is common in many business and economic settings. Two distinct behavioral economics theories, the trust-embedded model and the level-k model, have emerged to explain how cheap talk works between human decision makers. The trust-embedded model considers that decision makers are motivated by nonpecuniary motives to be trusting and trustworthy. In contrast, the level-k model considers that decision makers are purely self-interested but limited in their ability to think strategically. Although both theories have been successful in explaining cheap-talk behaviors in separate contexts, they point to contrasting drivers for human behaviors. In this paper, we provide the first direct comparison of both theories within the same context. We show that, in a cheap-talk setting that well represents many practical situations, the two models make characteristically distinct and empirically distinguishable predictions. We leverage past experiment data from this setting to determine what aspects of cheap-talk behavior each model captures well and which model (or combination of models) has better explanatory power and predictive performance. We find that the trust-embedded model emerges as the dominant explanation. Our results, thus, highlight the importance of investing in systems and processes to foster trusting and trustworthy relationships in order to facilitate more effective cheap-talk interactions

Competitive Consequences of Using a Category Captain

Many retailers designate one national brand manufacturer in each product category as a “category captain” to help manage the entire category. A category captain may perform demand-enhancing services such as better shelf arrangements, shelf-space management, and design and management of in-store displays. In this paper, we examine when and why a retailer may engage one manufacturer exclusively as a category captain to provide such service and the implications. We find that demand substitutability of competing brands gives rise to a service efficiency effect—service that expands the category is more effective in increasing a manufacturer\u27s sales and margin than service that shifts demand from a rival\u27s brand. We show that the service efficiency effect may motivate a category captain to provide a service that benefits all brands in the category even though doing so is more costly. We further show that, in categories that are less price competitive, there is higher competition between manufacturers to become the category captain. Consequently, a retailer may obtain better service by using a category captain than by engaging both manufacturers simultaneously. Our findings may help explain why a retailer may rely on a category captain despite concerns regarding opportunism and why there is limited empirical evidence of harm to rival manufacturers

Competitive Consequences of Using a Category Captain

Many retailers designate one national brand manufacturer in each product category as a “category captain” to help manage the entire category. A category captain may perform demand-enhancing services such as better shelf arrangements, shelf-space management, and design and management of in-store displays. In this paper, we examine when and why a retailer may engage one manufacturer exclusively as a category captain to provide such service and the implications. We find that demand substitutability of competing brands gives rise to a service efficiency effect—service that expands the category is more effective in increasing a manufacturer\u27s sales and margin than service that shifts demand from a rival\u27s brand. We show that the service efficiency effect may motivate a category captain to provide a service that benefits all brands in the category even though doing so is more costly. We further show that, in categories that are less price competitive, there is higher competition between manufacturers to become the category captain. Consequently, a retailer may obtain better service by using a category captain than by engaging both manufacturers simultaneously. Our findings may help explain why a retailer may rely on a category captain despite concerns regarding opportunism and why there is limited empirical evidence of harm to rival manufacturers

Essays on competitive strategies in wireless markets

Wireless service providers often partner with firms that provide complementary offerings. In two separate essays, I develop and analyze game theoretic models to examine how service providers structure their relationships with handset vendors and with mobile application providers to gain competitive advantage. In my first essay, I examine the rationale for exclusive tie-ups for handsets. I find that an exclusive tie-up may be a means for a service provider to raise its rival\u27s handset costs. Interestingly, exclusive tie-ups are more likely when service providers are already differentiated in their service. Thus, I find that such arrangements are a means to leverage existing service differentiation rather than remedy a lack thereof. My results might explain why we observe more exclusive tie-ups in the U.S. than in Europe. In my second essay, I examine a service provider\u27s mobile application strategy. Service providers have traditionally offered applications as add-ons to their existing subscribers through custom portals. However, some service providers have recently started to sell network bandwidth to application providers, allowing them to sell directly to all consumers. I find that this shift in strategy may benefit a service provider by reducing the rival service provider\u27s value of acquiring subscribers, thereby softening competition for subscribers. I also find that this shift is more beneficial for a service provider when applications are not very sensitive to network coverage. This might explain why service providers have begun to offer bandwidth insensitive applications acting as application pipes rather than as portals