An Analysis of the Impact of Social Factors on Purchase Behavior

Consumers purchase conspicuous goods to satisfy not just material needs but also social needs such as prestige. In an attempt to meet these social needs, marketing managers of conspicuous goods like cars, perfumes, and watches employ several strategies to highlight the exclusivity of their products. These strategies include using exclusive distribution, charging high prices, and limiting production. Further, marketing textbooks suggest that the demand curve for prestige goods could be upward sloping and therefore firms should not set prices which are ``too low''. In this paper we examine whether the desire for exclusivity can lead to an upward-sloping demand curve. We also investigate how social factors such as the desire for exclusivity and conformity affect prices and firms' profits. To analyze these issues, we develop a model of conspicuous consumption using the rational expectations framework. We consider two different market structures: monopoly and duopoly. Our results shows that the desire for exclusivity can lead to an upward-sloping demand curve when there is a segment of consumers who are (weakly) conformists. The impact of exclusivity and conformity on prices and profits varies with the market structure. Interestingly, an increase in perceived functional differentiation of products consumed by snobs could decrease firms' profits and prices. In the laboratory, we observe an upward sloping demand curve for snobs, in both the monopoly and duopoly setting. We also track consumer's expectations, and find on average that subjects' beliefs are consistent with the observed outcome and the rational expectations equilibrium solution.Game Theory, Experimental Economics, Consumer Behavior, Rational Expectations, Prestige Pricing,

Excessive expenditure in twostage contests: theory and experimental evidence

Abstract Symmetric, budget-constrained, and financially motivated members of independent groups participated in a series of two-stage contests to win a single, commonly valued, and exogenously determined prize. We present and test an equilibrium model that, in addition to the utility of receiving the prize, incorporates 1) a non-pecuniary utility of winning each stage of the contest, and 2) allows for misperception of the probability of winning, which is determined by Tullock's contest success function. The equilibrium solution accounts for the major finding of excessive aggregate expenditures in stage 1 of the contest. We then test a Cognitive Hierarchy model that attributes individual differences in stage 1 expenditures to different levels of depth of reasoning. Although the explanatory power of this model is limited, it suggests a critical role to the nonpecuniary utility of winning in accounting for the excessive expenditures.

Collaborating to compete: A game-theoretical model and experimental investigation of competition among alliances

In collaborating to compete, firms forge different types of strategic alliances: same function alliances (e.g., R & D alliance), cross-function alliances (e.g., marketing and production alliance) and even parallel development of new products. In this research we examine how the type of an alliance and the prescribed profit-sharing arrangement affect the resource commitments of partners in the alliance. We model the interaction within an alliance as a noncooperative variable-sum game, in which each firm invests a part of its resources to increase the utility of a new product offering. Different types of alliances are modeled by varying how the resources committed by partners in an alliance determine the utility of the jointly-developed new product. We then model the inter-alliance competition by nesting two independent intra-alliance games in a super game where the groups compete for a market. The partners of the winning alliance share the profits in one of two ways: equally or in proportion to their investments. The Nash equilibrium solutions for the resulting games are investigated. In the case of same-function alliances, when the market is large the predicted investment patterns under both profit sharing rules are comparable. Partners developing new products in parallel, unlike the partners in a same function alliance, commit fewer resources to their alliance. However, the profit-sharing arrangement matters in such alliances—partners commit more resources when profits are shared proportionally rather than equally. In cross-functional alliances, the partners are playing a coordination game with multiple Nash equilibria. We tested the predictions of the model in a series of laboratory experiments in which subjects played the inter-alliance competition game for a monetary payoff. The experimental results support the theoretical model. We show that reinforcement-based learning, rather than belief-based learning, explains how subjects came to conform to the model. Our analysis of Robertson and Gatignon\u27s survey data on the conduct of corporate partners in technology alliances adds further support to the model for same-function alliances

In search of experimental support for an asymmetric equilibria solution in symmetric investment games

In one of their experimental studies, Rapoport and Amaldoss [Rapoport, A., Amaldoss, W., 2000. Mixed strategies and iterative elimination of strongly dominated strategies: an experimental investigation of states of knowledge. Journal of Economic Behavior and Organization 42, 483-521] evaluate the behavior of subjects in a two-person investment game with symmetric players using the symmetric (completely) mixed-strategy equilibrium solution as the normative benchmark. Dechenaux et al. [Dechenaux, E., Kovenock, D., Lugovskyy, V., 2006. Caps on bidding in all-pay auctions: comments on the experiments of A. Rapoport and W. Amaldoss. Journal of Economic Behavior and Organization 61, 276-283] claim additional support for an alternating (asymmetric) equilibria solution. However, both aggregate and individual level analyses of our data soundly reject the asymmetric alternating equilibria solution. (C) 2007 Elsevier B.V. All rights reserved

Social dilemmas embedded in between-group competitions : effects of contest and distribution rules

We consider two classes of collective action problems that occur simultaneously at several levels of hierarchical organizations. Our objective is to model how individual incentives to cooperate in the two most commonly studied types of within-group social dilemmas are enhanced when these dilemmas are embedded in between-group competitions for divisible private goods. We classify these problems in terms of three dimensions, namely, the payoff structure of the within-group conflict, the contest rule used to determine the outcome of the between-group competition, and the profit sharing rule for dividing the private good, or prize, among members of the winning group. Nash equilibrium solutions are constructed for these two classes of collective action problems, and experimentally testable predictions concerning group size, contest rules, and the comparison of proportional vs. egalitarian profit-sharing rules on individual contributions are derived and exemplified

Direct-to-Consumer Advertising of Prescription Drugs: A Strategic Analysis

Consumers cannot purchase a prescription drug without a prescription from a physician, yet many prescription drugs are promoted to consumers with the help of direct-to-consumer (DTC) advertising. In this paper, we propose and test a competitive model of DTC advertising. We find that the brand specificity of DTC advertising can have an inverted U-shaped relationship with detailing, DTC advertising, and profits. Furthermore, an increase in the cross-price sensitivity between competing prescription drugs is not always detrimental to firm profits. A laboratory test lends qualitative support to some of our model predictions. We also discuss potential implications of DTC advertising for generic drugs and over-the-counter drugs.direct-to-consumer advertising, pharmaceutical marketing, experimental economics, game theory

—Trading Up: A Strategic Analysis of Reference Group Effects

Reference groups influence product and brand evaluations, especially when the product is a publicly consumed luxury good. Marketers of such luxury goods need to carefully balance two important social forces: (1) the desire of leaders to distinguish themselves from followers and (2) the countervailing desire of followers to assimilate with leaders. In this paper, we examine the theoretical implications of these social forces for firm prices, product design, and target consumer selection. We show that the presence of reference group effects can motivate firms to add costly features, which provide limited or no functional benefit to consumers. Furthermore, reference group effects can induce product proliferation on one hand and motivate firms to offer limited editions on the other hand. We find that offering a limited edition can increase sales and profits. In some cases, reference group effects can even lead to a buying frenzy.reference groups, luxury goods, game theory