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

Refocusing Loyalty Programs in the Era of Big Data: A Societal Lens Paradigm

Big data and technological change have enabled loyalty programs to become more prevalent and complex. How these developments influence society has been overlooked, both in academic research and in practice. We argue why this issue is important and propose a framework to refocus loyalty programs in the era of big data through a societal lens. We focus on three aspects of the societal lens-inequality, privacy, and sustainability. We discuss how loyalty programs in the big data era impact each of these societal factors, and then illustrate how, by adopting this societal lens paradigm, researchers and practitioners can generate insights and ideas that address the challenges and opportunities that arise from the interaction between loyalty programs and society. Our goal is to broaden the perspectives of researchers and managers so they can enhance loyalty programs to address evolving societal needs

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

Multiplicity of equilibria and information structures in empirical games: challenges and prospects

Abstract Empirical models of strategic games are central to much analysis in marketing and economics. However, two challenges in applying these models to real world data are that such models often admit multiple equilibria and that they require strong informational assumptions. The first implies that the model does not make unique predictions about the data, and the second implies that results may be driven by strong a priori assumptions about the informational setup. This article summarizes recent work that seeks to address both issues and suggests some avenues for future research

The Value of Market Information in the Dynamics of a Capital-Intensive Industry: The Case of DRAM Manufacturing *

Abstract Much like in other semiconductor environments, DRAM manufacturers face significant demand uncertainty before production and capacity decisions can be implemented. This paper investigates the role and assesses the value of market information in the DRAM manufacturing industry. A dynamic oligopoly model of competition with capacity constraints is developed, where firms hold information about demand. The model reveals that better information is especially beneficial when the market performs poorly. In addition, a non-linear relationship between the quality of the information and the performance of the industry is found, once the costs of adjusting capacity levels are incorporated. The equilibrium is solved through an approximation of the firms' actions conditional on the market information available to them, and the parameters are estimated through the simulated method of moments. The model recovers the market information that rationalizes the decisions of the firms. The available market information is valued at approximately 290 million dollars for the industry per quarter, and is estimated to have yielded returns of 1,6 billion dollars during the recent DRAM market 'bust' period