buyer initiated vs seller initiated information revelation sales presentations are the core of the selling process where salespeople provide information to prospects one challenge is that the amount of information available to be potentially communicated may exceed salespeople s ability to communicate or customers ability to process there is limited bandwidth between the firm and customers one important decision then is which information should customers see what the firm chooses to tell customers may be informative in itself when constrained to a seller initiated information revelation format where the firm chooses which feature to show the firm never finds it optimal to offer more features than it is able to inform customers about consequently customers never find credible a claim that the product has all features the important implication is that price alone cannot serve as a signal of quality in this setting in contrast a buyer initiated information revelation format where customers decide which information to receive increases the probability of a sale and also results in the production of higher quality products in a competitive setting by adopting buyer initiated information revelation firms are able to attain positive profits this is due to the fact that customers infer the product s quality from the price along with the information revelation format customers know that at some prices firms find it profitable to produce high quality products and at other lower prices this is not the case thus customer empowerment leads to higher profits

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

pricing under quality of service uncertainty market segmentation via statistical qos guarantees abstract this article examines how performance contingent pricing schemes with long term statistical performance guarantees can be applied to many it services we study two forms of performance contingent pricing with rebate proportional to failure rate and fixed rebate for below threshold performance we show that threshold performance contingency pricing can increase both profits and fairness customers who receive higher benefits pay higher effective price relative to standard pricing but an even better solution is to offer a menu of performance guarantees this can increase the firm s profit and segment the market only service providers whose performance level is sufficiently better than the industry standard can benefit from this pricing mechanism

signaling quality with a money back guarantee the role of transaction costs direct marketing is witnessing explosive growth as consumers increasingly purchase products from their homes their ability to judge the quality of products they buy is significantly reduced in this paper we study how money back guarantees can signal product quality in such environments we interpret product quality broadly to mean both the level of attributes promised as well as the firm s consistency in delivering on those promises key aspects of our formulation are the explicit consideration of transaction costs and alternative signals of product quality transaction costs are the costs the seller or buyer faces when redeeming a money back guarantee we show that money back guarantees signal quality by exploiting the higher probability of returns for a lower quality product and the attendant higher transaction costs however if the seller s transaction costs are very large then there are less costly ways to signal namely charging a high price we compare the signaling performance of 1 price 2 price with uninformative advertising and 3 price with a money back guarantee whereas uninformative advertising does not work at all in our model under certain conditions a money back guarantee is necessary to signal and under other conditions a money back guarantee is a useful supplement to price

money back guarantees and market experimentation abstract we study the use of money back guarantees as a form of market experimentation in a market for experience goods with repeat purchases we show that extending the customer base in the second period by using a money back guarantee can be optimal only if a monopolist faces an uncertain distribution of buyers within the second period a money back guarantee allows the monopolist to discriminate between new and repeat purchasers while a pure price reduction does not thus whenever money back guarantees are feasible an optimal experimentation strategy includes a money back guarantee in the second period but not necessarily a price reduction

a model of the it products in fashion one of the characteristics of the fashion marketplace is the unpredictability and apparent randomness of fashion hits another one is the information asymmetry among consumers in this paper we consider fashion as a means consumers use to signal belonging to a higher social rank and propose an analytical model of fashion hits in the presence of competition and consumers who can coordinate on which product to use we show that consistent with the observed market phenomenon in equilibrium consumer coordination involves randomization between products chosen i e in randomness of fashion hits analyzing optimal consumer choice we find that whenever low type consumer demand for a product is positive a price increase results in a higher probability of high type consumers choosing this product but lower low type consumer demand we also show that although high type consumers may prefer higher prices that would lead to complete separation of the high and the low type consumers through product use in equilibrium firms always price as to attract positive demand from low type consumers the equilibrium price and profits turn out to be nonmonotonic in the low type consumer valuation of being recognized as belonging to a higher social rank equilibrium profits first increase and then decrease in this valuation

raising awareness and signaling quality to uninformed consumers a price advertising model the objective of this paper is to investigate the firm s optimal advertising and pricing strategies when introducing a new product we extend the existing signaling literature on advertising spending and price by constructing a model in which advertising is used both to raise awareness about the product and to signal its quality by comparing the complete information game and the incomplete information game we find that the high quality firm will reduce advertising spending and increase price from their respective complete information levels in the separating equilibrium the high quality firm will actually spend less on advertising than the low quality firm resulting in a negative correlation between product quality and advertising spending what sets our analysis apart from previous studies is that we consider advertising spending not only as a signaling device but also as an informational device when advertising spending is just a signaling device it is purely a dissipative expense it can be an effective signal of quality because only the high quality firm can afford it thus consumers can infer the product s quality by its advertising spending in this case advertising spending and product quality are positively correlated however when advertising also serves the purpose of raising awareness it endogenizes the size of the market for the firm so it is not just a dissipative expense any more consider the low quality firm s mimicking strategy in this case when the low quality firm is believed to be a highquality one it can charge a much higher price than if its true quality were known given that its marginal cost is lower than the high quality firm s its profit margin will be much larger in mimicry than in revealing its true quality indeed its profit margin will be even greater than the high quality firm s therefore the low quality firm in mimicry has a strong incentive to increase its advertising spending from its optimal level when its true quality is known to deter the low quality firm s mimicking tendency the high quality firm should decrease its advertising spending so that mimicry is not as appealing to the low quality firm as revealing its true quality indeed the high quality firm should reduce its advertising spending so much that it advertises less than the low quality firm in equilibriummany have interpreted signaling as burning money or throwing money down the drain in the case of advertising the claim is that its purpose is simply to show consumers that the firm can afford to squander money on advertising to signal its quality hence the advertising content need not be informative however our results show that simply burning money is not enough to signal quality how the money is burned is also important when advertising raises awareness as well as signals quality saving money rather than burning money is the correct signaling approach although ultimately the high quality firm will sacrifice some profit by reducing its market size the intuition behind this result is that when information is incomplete the high quality firm cannot fully exploit its advantages whenever its advantages in quality and or marginal costs are lessened a firm will want to spend less on advertising

service escape profiting from customer cancellations this paper explores the benefits of letting customers escape from prepurchased service contracts by offering refunds for cancellations we show that such a policy creates opportunities for multiple selling in a capacity constrained service i e collecting cancellation fees from advance buyers who cancel and then reselling the freed slots the better the alternative that motivates a cancellation the more profitable is a refund for cancellations policy compared with a no refund policy that locks in customers in contrast to previous research on money back guarantees for durable goods we show that offering refunds for service cancellations can be profitable 1 without charging a higher price compared with a no refund policy and 2 even when advance buyers would be willing to abandon the service for no refund also service providers should decrease rather than increase the customer hassle cost of cancellations our research also suggests a new profit advantage of advance selling i e capturing some of the consumer added surplus created when customers find new alternatives and are therefore willing to pay a fee to terminate the prepurchased contract finally yield management research typically assumes exogenous no shows by advance buyers we suggest that offering refunds for cancellation reduces the need to reserve capacity for high paying customers and improves capacity utilization

facilitating fit revelation in the competitive market this study examines firms strategic decisions in the competitive market regarding whether to engage in marketing activities to assist consumers in finding the fit between their personal tastes and products horizontal attributes we find that competitive firms strategies to facilitate fit revelation critically depend on the product qualities they offer in particular a firm offering a high quality product is more likely to facilitate fit revelation in the competitive market than it would as a market monopolist whereas a firm offering a low quality product is less likely to do so in addition the firm offering the high quality product implements fit revealing activities in a greater intensity than its rival that offers the low quality product if the quality difference between the two products is small and both products qualities are sufficiently high

the making of a hot product a signaling explanation of marketers scarcity strategy every marketer s dream is to create a hot product that customers would absolutely want to have thus generating considerable profit to the marketer according to one school of thought marketers should make products hard to get in order to create really hot products in this paper using a game theoretic model we investigate if such scarcity strategies can indeed be optimal while a scarcity strategy may appear to be a viable approach for making a firm s product successful further analysis raises some puzzling issues in particular it is not clear why a firm would not increase its price to get demand and supply in sync and increase its profit in the process we therefore offer a signaling explanation for the optimality of such strategies and show that a high quality seller may optimally choose to make the product scarce in order to credibly signal the quality of its product to uninformed customers our analysis indicates that a high quality seller optimally employs scarcity as a signaling device in product markets that are characterized ceteris paribus by a small difference in marginal cost between high and low quality products a low reservation price for a low quality product a greater heterogeneity in reservation prices for a high quality product and a moderate number of informed consumers our results provide a rationale for the fact that scarcity strategies are usually observed for discretionary or specialty products but not for commodity products staple products or new to the world products

monopoly provision of product quality and warranties an exploration in the theory of multi dimensional screening we address the monopoly problem of designing and pricing a product line of goods distinguished by different quality and warranty levels consumers vary in their evaluations of these attributes so that the problem is one of screening it is sufficiently complex that the local approach commonly used does not work instead we use new techniques for dealing with incentive constraints between nonadjacent consumer types these techniques allow us to characterize optimal allocations that may not be monotonic in particular although the more eager types of buyer do pay higher prices and yield the monopoly higher profit they may receive lower quality or lower warranty coverage we find preference restrictions that restore monotonicity concave risk tolerance implies that warranty coverage increases in type and constant absolute risk aversion implies that quality increases in type

demonstrations and price competition in new product release we incorporate product demonstrations into a game theoretic model of price competition demonstrations may include product samples trials return policies online review platforms or any other means by which a firm allows consumers to learn about their value for a new product in our model demonstrations help individual consumers to learn whether they prefer an innovative product over an established alternative the innovative firm controls demonstration informativeness when the innovative firm commits to demonstration policies and there is flexibility in prices the firm is best off offering fully informative demonstrations that divide the market and dampen price competition in contrast when a firm can adjust its demonstration strategy in response to prices the firm prefers only partially informative demonstrations designed to maximize its market share such a strategy can generate the monopoly profit for the innovative firm we contrast the strategic role of demonstrations in our framework with

exit option in hierarchical agency abstract we explain why organizations that limit the voice of their agents can benefit from granting them an exit option we study a hierarchy with a principal a productive supervisor and an agent communication is imperfect in that only the supervisor can communicate with the principal while the agent has no direct voice to the principal we show that the principal is better off if she grants the agent the option to walk away from the contract by doing so the principal is implicitly giving a veto power to the agent this in turn restricts the manipulation of report by the supervisor thus the exit option can be interpreted as a remedy for limits on communication our finding contrasts to the traditional result from the contract theory literature that the exit option reduces the principal s welfare while protecting the agent our result is robust to the case of collusion between the supervisor and the agent we also examine the optimal exit option i e whether exit should entail a payment to or from the agent

high and declining prices signal product quality high and declining prices signal a high quality product high prices are the efficient means of signaling because the consequent loss of sales volume is most damaging for lower cost lower quality products as time passes and the number of informed consumers increases the signaling distortion lessens resulting in a declining price profile the prediction of high and declining prices is robust across a variety of dynamic models and is consistent with recent empirical findings copyright 1991 by american economic association

optimal prices of an m g 1 jobshop this paper concerns the optimal control of input to a fifo jobshop with a single workstation the input is jobs for which the processing and delivery times are observable upon arrival the control is exercised by charging a price for each completed job the objective is either profit maximization or welfare maximization the semi markov decision processes that maximize the two objectives are studied simultaneously optimal prices are specified in terms of opportunity costs the opportunity cost of a job is the expected future loss of earnings caused by having the job submitted to the shop results for the cases with and without discounting are established simultaneously by a new approach it is based on the idea of studying the infinite horizon model directly and it allows the state space and the decision set to be denumerable mild assumptions ensure that the opportunity cost is increasing as a function of the work backlog and increasing and convex as a function of the processing time

what impedes efficient adoption of products evidence from randomized sales offers for fuel efficient cookstoves in uganda consumers failure to adopt products with health and wellbeing benefits apparently far greater than their costs has consistentlychallenged the widespread use of health improving technologies a sales offer combining free trial time payments and the option of returning the product can overcome barriers such as liquidityconstraints and poor information about benefits and usability we tested this sales offer and alternatives in an experiment with a fuel efficient charcoal stove in urban uganda and a fuel efficient wood stove in rural uganda this offer dramatically increased uptake in urban kampala from 4 to 46 and in rural mbarara from 5 to 57

managing consumer returns in a competitive environment this paper investigates the pricing and restocking fee decisions of two competing firms selling horizontally differentiated products we model a duopoly facing consumers who have heterogeneous tastes for the products and who must experience a product before knowing how well it matches with their preferences the analysis yields several key insights restocking fees not only can be sustained in a competitive environment but also are more severe when consumers are less informed about product fit and when consumers place a greater importance on how well products attributes fit with their preferences we compare the competitive equilibrium prices to a scenario in which consumers are certain about their preferences and find conditions defining when consumer uncertainty results in higher equilibrium prices comparison to a monopoly setting yields a surprising result equilibrium restocking fees in a competitive environment can be higher than those charged by a monopolist this paper was accepted by jagmohan s raju marketing

a search model of costly product returns abstract this paper analyses a market in which consumers buy horizontally differentiated products without knowing their exact valuations by paying return costs the consumers may return less preferred items and obtain refunds the consumers shop sequentially and their shopping strategy is similar to the search strategy of a consumer in a sequential costly search model thus the pricing strategies of firms are identical to those in a price directed sequential search model price competition is more intense and the symmetric equilibrium price is lower when returns are costlier as a result consumer surplus is increasing in the return cost

contingent pricing to reduce price risks the price for a product may be set too low causing the seller to leave money on the table or too high driving away potential buyers contingent pricing can be useful in mitigating these problems in contingent pricing arrangements price is contingent on whether the seller succeeds in obtaining a higher price within a specified period we show that if the probability of obtaining the high price is not too high sellers profit from using contingent pricing while economic efficiency increases the optimal contingent pricing structure depends on the buyer s risk attitude a deep discount is most profitable if buyers are risk prone a consolation reward is most profitable if buyers are risk averse to motivate buyers to participate in a contingent pricing arrangement the seller must provide sufficient incentives consequently buyers also benefit from contingent pricing in addition because the buyers with the highest willingness to pay get the product contingent pricing increases the efficiency of resource allocation

an empirical analysis of scarcity strategies in the automobile industry recent product introductions such as the xbox 360 sony playstation 2 and pt cruiser have been characterized by shortage of these products some experts have suggested that such scarcity can be a deliberate strategy for making the product more desirable in this paper we empirically examine the relationship between introductory inventory levels and consumer preference in the u s automobile industry and show that relative scarcity of a car at the time of introduction is associated with higher consumer preference for the product furthermore we perform an empirical test of alternative theories about the rationale for introductory product scarcity specifically we consider two theories of supplier induced scarcity namely the buying frenzy theory and the signaling theory and an alternative theory that suggests that demand uncertainty causes introductory product scarcity we find more support for the signaling theory of supplier induced scarcity than the buying frenzy theory or the demand uncertainty theory in our analysis of the automobile market

the option value of returns theory and empirical evidence when a firm allows the return of previously purchased merchandise it provides customers with an option that has measurable value whereas the option to return merchandise leads to an increase in gross revenue it also creates additional costs selecting an optimal return policy requires balancing both demand and cost implications in this paper we develop a structural model of a consumer s decision to purchase and return an item that nests extant choice models as a special case the model enables a firm to both measure the value to consumers of the return option and balance the costs and benefits of different return policies we apply the model to a sample of data provided by a mail order catalog company we find considerable variation in the value of returns across customers and categories when the option value is large there are large increases in demand for example the option to return women s footwear is worth an average of more than 15 per purchase to customers and increases average purchase rates by more than 50 we illustrate how the model can be used by a retailer to optimize his return policies across categories and customers

selling formats for search goods the paper offers a comparative analysis of different ways to sell products selling formats when buyers incur evaluation costs since these costs are sunk at the moment of trade buyers may refrain from incurring them for fear of later opportunism on the part of sellers it is found that the use of many common selling formats can be explained in terms of their ability to alleviate this problem specifically i explain price advertising seller colocation and bargaining the theory explains much of the divergence in retail trading institutions and leads to several testable predictions

voluntary quality disclosure and market interaction marketers disclose quality information directly to potential consumers using a variety of communication channels this study investigates how competition may influence duopoly firms incentive to voluntarily reveal quality information we show that firms in competitive markets reveal less information than a monopoly firm in addition sequential disclosure leads to asymmetric equilibrium disclosure behavior the disclosure leader reveals unambiguously less information than in the simultaneous disclosure case whereas the follower ex ante reveals less more private information than that released by the leader or by the firms in the simultaneous case when the disclosure cost is sufficiently low high we also examine the equilibrium firm profits and social welfare we demonstrate that there may be a u shaped relationship between equilibrium monopoly profits or social welfare under both monopoly and duopoly and the disclosure cost moreover in comparison to the simultaneous disclosure case sequential disclosure can lead to increasingly softened competition improving both firm profitability and social welfare

demand signalling and screening in channels of distribution this paper examines two ways channel members at the manufacturing and retail ends deal with asymmetric information in the context of new product introduction a manufacturer who has private information that demand for a new product will be high can differentiate itself from a manufacturer less confident of demand by undertaking high levels of pre launch advertising and offering a high wholesale price a retailer for its part can screen potentially high demand from potentially low demand products by stipulating a take it or leave it slotting allowance the assumption being that the offer will be accepted only by manufacturers confident of sufficient demand to recover the high initial cost of slotting allowances it is shown that manufacturers prefer to signal demand through advance advertising and wholesale price retailers to screen demand through slotting allowances it is shown that unless advance advertising is sufficiently effective slotting allowances yield higher total channel profits and higher social welfare

service cancellation and competitive refund policy although previous research demonstrates the profitability of partial refund policies in a monopoly setting there is a certain lack of ubiquity in practice about these refunds in competitive service markets this raises the question of how a partial refund policy may work and whether it is even sustainable in a competitive environment this study investigates how competition may influence the profitability and the equilibrium choice of refund policies it is shown that partial refunds may endogenously change the nature of strategic interaction between service providers from local monopolies into a competition regime which moderates the gains from exploiting the efficiency enhancing effect of partial refunds a whole range of pure strategy equilibria can be obtained as a result of the interplay between the efficiency improving and the competition intensifying effects when the capacity is small large such that the efficiency improving the competition intensifying effect is dominant both firms in equilibrium follow identical partial zero refund policies moreover interestingly the symmetric firms may end up in an asymmetric equilibrium in which one firm follows a partial refund policy and the other adopts a zero refund policy

consumer uncertainty and purchase decision reversals theory and evidence this research examines how prepurchase information that reduces consumer uncertainty about a product or service can affect consumer decisions to reverse an initial product purchase or service enrollment decision one belief commonly held by retailers is that provision of greater amounts of information before the purchase reduces decision reversals we provide theory and evidence showing conditions under which uncertainty reducing information provided before the purchase decision can actually increase the number of decision reversals predictions generated from an analytical model of consumer behavior incorporating behavioral theory of reference dependence are complemented by empirical evidence from both a controlled behavioral experiment and econometric analysis of archival data combined the theory and evidence suggest that managers should be aware that their information provision decisions taken to reduce decision reversals may actually increase them data as supplemental material are available at http dx doi org 10 1287 mksc 2015 0906

uncertainty risk aversion and wta vs wtp we examine a previously unstudied category of exchange items in which the true value is unknown to both the buyer and seller at the time of exchange but becomes known to both at a future time after the exchange real world examples of such exchange items as in our study include forward contracts and fixed fee turnkey contracts we demonstrate that the discrepancy between the seller s willingness to accept wta and buyer s willingness to pay wtp increases with 1 the level of uncertainty about the exchange item s value and 2 the exchange parties level of risk aversion in a series of studies we manipulate and measure the level of uncertainty of the exchange item measure the level of risk aversion of the exchange parties and study the respective effects on decreasing the wtp while increasing the wta

firm strategies in the mid tail of platform based retailing while millions of products are sold on its retail platform amazon com itself stocks and sells only a very small fraction of them most of these products are sold by third party sellers who pay amazon a fee for each unit sold empirical evidence clearly suggests that amazon tends to sell high demand products and leave long tail products for independent sellers to offer we investigate how a platform owner such as amazon facing ex ante demand uncertainty may strategically learn from these sellers early sales which of the mid tail products are worthwhile for its direct selling and which are best left for others to sell the platform owner s cherry picking of the successful products however gives an independent seller the incentive to mask any high demand by lowering his sales with a reduced service level unobserved by the platform owner we analyze this strategic interaction between a platform owner and an independent seller using a game theoretic model with two types of sellers one with high demand and one with low demand we show that it may not always be optimal for the platform owner to identify the seller s demand interestingly the platform owner may be worse off by retaining its option to sell the independent seller s product whereas both types of sellers may benefit from the platform owner s threat of entry the platform owner s entry option may reduce consumer surplus in the early period although it increases consumer surplus in the later period we also investigate how consumer reviews influence the market outcome

when showrooming increases retailer profit abstractshowrooming the phenomenon of consumers visiting a brick and mortar b m store to learn about products but then buying online to obtain lower prices is attracting increased attention both in business practice and in academic literature it is considered a major threat to the b m retailers and determining how to fight it seems to be the only consideration however the manufacturer s need for retail informational services has always been one of the essential reasons for retailers to exist and is a means for retailers to achieve profitability the popular arguments about the threat of showrooming ignore the strategic role of the manufacturer in the distribution channel this article analytically shows that when the manufacturer s decisions are considered i e when the manufacturer retailer contract is endogenous consumers ability to engage in showrooming may lead to increased rather than decreased profitability for b m retailer s thus retail efforts to restrict showrooming behavior m

price endings when prices signal quality this paper provides a theoretical explanation for why firms behave as though they use round prices to signal quality by replacing the linear demand curve in bagwell and riordan s 1991 price as a signal of quality model with a kinked demand curve and analyzing what price endings firms are most likely to use the following observations can be made 1 firms that are using high prices to signal quality are more likely to set those prices at round numbers and 2 price endings themselves are not necessarily signals of quality a simulation was conducted to demonstrate that these findings generally hold true even in the presence of demand spikes at 9 ending prices e g schindler and kibarian 1996 finally empirical evidence is provided to demonstrate that firms tend to use more round prices for higherquality products and that this relationship is even stronger for product categories where consumers are less able to detect the true level of quality prior to purchase

the sound of silence observational learning in the u s kidney market mere observation of others choices can be informative about product quality this paper develops an individual level dynamic model of observational learning and applies it to a novel data set from the u s kidney market where transplant candidates on a waiting list sequentially decide whether to accept a kidney offer we find strong evidence of observational learning patients draw negative quality inferences from earlier refusals in the queue thus becoming more inclined towards refusal themselves this self reinforcing chain of inferences leads to poor kidney utilization despite the continual shortage in kidney supply counterfactual policy simulations show that patients would have made more efficient use of kidneys had the concerns behind earlier refusals been shared this study yields a set of marketing implications in particular we show that observational learning and information sharing shape consumer choices in markedly different ways optimal marketing strategies should take into account how consumers learn from others

the strategic impact of references in business markets we investigate a business to business context and ask when and why a firm should announce a reference program that commits the firm to facilitating the flow of information about the efficacy of its products from early adopters to potential late adopters we model a monopolist manufacturer with a new innovation that can be sold to two potential customers we demonstrate here two benefits of a reference program that relate not to an increase in later adopters willingness to pay but to an increase in the willingness to pay of the early adopters themselves the impact on the early adopters willingness to pay arises in two ways as a result of their observation of the firm s commitment to information transmission first in a model of symmetric uncertainty we show that the announcement of a reference program facilitates dynamic pricing by the manufacturer in the sense that it allows the firm to provide temporary exclusive use of the technology to one of the customers this creates more value which the manufacturer can extract via a higher price in this way a reference program can serve as a partial substitute for an exclusive use contract in a model with asymmetric information we demonstrate that under certain conditions the firm is able to use the reference program as a signal again to the early adopting customer that its technology is of high quality however such a signal requires significant discounts to early adopters to ensure separation as a result a pooling equilibrium dominates in which the manufacturer fosters references regardless of its quality finally by allowing the firms private information to be stochastic we show that separation may be a dominant outcome

salesforce compensation scheme and consumer inferences we investigate the salesforce compensation strategy of a firm selling products in a category that several consumers find technically sophisticated such as electronics or financial products with legal fine print consumers are unable to judge the value difference between a baseline product and a product upgrade with add on features while the firm and the salespeople are informed of the value of these features consumers are uncertain thus consumers have to rely on sales assistance to evaluate alternatives the salesperson decision variables include selling effort and whether to oversell the consumer by overclaiming the value of added features because sales revenue depends on both the salesperson s selling effort and consumers valuation of the added features the salesforce incentive scheme which can consist of salary sales commission or consumer satisfaction based commission may induce the short term oriented salesperson to misrepresent the value of the upgrade exaggeration of the value of the added features however results in reduced satisfaction levels leading to lower profits for the firm we show that a salesperson selling products where the value of the upgrade is low prefers to make higher claims when the sales commission rate is sufficiently high we conjecture that consumers aware of the incentive structure facing the salesperson expect the true value of the add on feature to be lower than the claimed value we study the optimal compensation scheme of a firm which has to communicate her true type and retain its salesforce credibility we identify the conditions under which a high upgrade type firm indicates its true value by altering sales commission rate and satisfaction based commission rate

exogenous learning seller induced learning and marketing of durable goods when learning of product characteristics takes some time a firm introducing a new durable faces the trade off between releasing early to an uninformed market and deferring release to a better informed market in a two period monopoly we examine the strategic interaction between exogenous learning el and seller induced learning sil and the firm s product release and pricing strategies the familiar direct effect of strong learning is to facilitate a higher price for informed customers we point out its indirect effect of inducing a higher period 1 price for uninformed customers by lowering their expected utility from learning these two effects underlie three major results first a strong learning intensity does not always imply deferred release surprisingly for medium unit costs the firm releases late early when learning intensity is weak strong second sil facilitates different product release strategies depending on the unit cost level potential sil investment facilitates early release for low or medium unit costs but may facilitate deferred release for high unit costs lastly when customers have heterogeneous prior valuation the high end customers may buy early at a lower price and the low end customers may buy later at a higher price contrary to the usual skim pricing with informed customers this paper was accepted by preyas desai marketing

response to competitive entry a rationale for delayed defensive reaction empirical studies examining responses to new product entries come to the puzzling conclusion that in general an incumbent reacts to a new entrant after a significant delay even easy to implement price cuts are observed after significant lag following entry these findings seem to contradict the existing literature that either implicitly assumes or strongly advocates immediate defensive responses to limit competitive encroachment when a competing firm enters the market consumers may be uncertain about the entering firm s product quality the incumbent firm through rigorous tests may fully know the entrant s quality suppose the incumbent aggressively lowers price this may cause the consumers to wonder if indeed the entrant s quality is high in other words an incumbent s reaction may cause the consumers to make inferences about the entrant s quality such strategic implications of the incumbent s reactions have to be carefully analyzed before determining the optimal response by the incumbent in this paper we propose a conceptual framework for understanding differences in the magnitude and timing of incumbents responses to competitive entries we consider a model in which a monopolist incumbent firm faces competitive entry the incumbent firm knows the true quality of the entrant with certainty although consumers are aware of the incumbent s product quality through their prior experience they are initially uncertain of the entrant s product quality in such a situation a high quality entrant has the incentive to signal her true quality through her strategic price choice however the uncertainty about the entrant s quality is favorable to the incumbent in the sense that consumers believe with a high probability that the entrant s quality is low as a result the strategic incentives facing the incumbent and the entrant oppose each other while the entrant wants to signal her high quality the incumbent wants to prevent her from doing so we demonstrate that one way the incumbent can prevent the quality signaling is to select a higher than his optimal competitive duopoly price in other words the incumbent can prevent or jam the entrant s quality signaling by choosing a price higher than his optimal competitive price when consumers are fully informed about the entrant s true quality though the signal jamming price is lower than the monopoly price the price is substantially higher than the competitive price this marginal reduction in the incumbent s price from the pre entry monopolistic price represents a muted or lack of response by the incumbent to the competitive entry however once the entrant s quality gets revealed in subsequent periods through consumer usage and word of mouth the entrant has no incentive to engage in quality signaling and the incumbent has no incentive to jam it therefore the market reverts to the complete information competitive prices and the incumbent lowers his price considerably this temporal pattern of muted price reduction in the first period followed by a sharp price reduction in the second period corresponds to a delayed defensive reaction in our model although the empirical studies suggest that the delayed reaction may arise due to factors such as managerial inertia or indecision we demonstrate that such a behavior is indeed an optimal strategy for a profit maximizing firm thus our model reconciles empirical results with the equilibrium outcome of a strategic analytical framework furthermore in an experimental setting we test the predictive power of our framework and establish that consumers indeed form conjectures about the entrant s quality based on the incumbent s reactions in the first experimental study we find strong support for the notion that the incumbent s price reaction may indicate entrant s quality in a follow up study we observe that whenever the incumbent lowers prices respondents judge the quality of the entrant to be higher as compared to the case when prices are the same or increased the managerial implication of this paper is that well established incumbent firms should be cautious in the implementation of their defensive responses to product introductions of uncertain quality by competitors of particular concern are situations where the reactions are easily observable by consumers a strong reaction may suggest that the incumbent takes the competitive threat seriously leading consumers to believe in the quality of the competitor s product

price matching guarantees as a direct signal of low prices if consumers believe that stores offering price matching guarantees pmgs charge low prices high search cost consumers will purchase from pmg stores this leads pmg stores demand to be less pric

signaling low margin through assortment oftentimes close competitors carry partially overlapping assortments in seeming contradiction to the principle of maximum differentiation one of the justifications of such practice is that an overlapping assortment with competitive prices on the common products may prevent further consumer search and therefore could be useful even when profits from the overlapping products do not justify the costs of carrying them in this paper we examine the validity of this intuition and show that such strategy may indeed be optimal when consumers are uncertain about prices they might find elsewhere and face shopping costs for discovery of all prices specifically we show that the larger assortment with product overlap may signal a competitive price of the relatively unique product and prevent further consumer search for a lower price on it an implication of this finding is that a consumer may rationally behave as if she likes a larger assortment even if the assortment is enlarged by adding products the consum

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

demand signalling under unobservable effort in franchising linear and nonlinear price contracts we study the signalling strategy of a principal who is privately informed about its high demand potential to an uninformed risk neutral agent we analyze the model in the context of a contract between a franchisor and a franchisee we examine the distortions of a two part pricing scheme necessary to credibly inform the franchisee agent we also study whether the inability of the franchisor principal to observe the agent s effort moderates or exaggerates the distortions from the first best two part pricing scheme a surprising outcome is that even though the principal incurs greater signalling cost the magnitude of distortion in the two part scheme is smaller when service is unobservable than when it is not thus a signalling strategy employing the fixed and variable fees is harder to detect under moral hazard empirical studies failing to control for moral hazard may incorrectly conclude that signalling strategy does not occur we later consider a three part scheme to verify whether or not the schem

warranties durability and maintenance two sided moral hazard in a continuous time model double moral hazard in continuous time generates the familiar warranty pattern with full coverage for an initial block of time the more complete the warranty the better the producer s durability incentives and the worse the consumer s maintenance incentives using continuous time highlights the need for some warranty bound to avoid reaching the first best as an unreasonable limit early in the paper an exogenous bound is used while later the bound arises endogenously from the possibility of abuse and repair a quadratic example shows that the warranty s duration depends on the relative severity of the two moral hazard problems

signaling new product reliability with after sales service contracts prior studies on performance based contracting pbc for after sales services have highlighted its advantages over traditional resource based contracting rbc when products are established and their reliability is known to all parties we develop a game theoretic model to investigate how these insights are affected when the vendor is privately informed about the reliability of a newly developed product a novel feature of our model is the interaction between reliability signaling private information and the vendor s discretionary investment in spares inventory private action which arises naturally in the setting we consider we find that this interaction leads to contrasting equilibrium outcomes under the two contracts rbc induces the vendor to focus on inventory savings leading to underinvestment in spares whereas pbc induces the vendor to focus on reliability signaling achieved through overinvestment in inventory as a result neither contract is efficient we investigate two means to mitigate this inefficiency but either approach has caveats a making inventory verifiable removes the trade off between reliability signaling and inventory investment but results in diverging contract preferences between the vendor and the buyer b pooling inventories across multiple buyers saves inventory costs but it also hinders reliability signaling potentially exacerbating inefficiency this paper was accepted by yossi aviv operations management

ex ante investment ex post remedy and product liability low quality products may cause consumer harm a firm can reduce the probability of low quality through ex ante investment before sales and can take remedy actions such as product recalls if it learns after sales that product quality is low an increase in the firm s product liability increases its incentive for ex post remedy more ex post remedy however may reduce the firm s ex ante quality investment on the other hand higher product liability increases consumer demand for the product resulting in high output and hence greater return to ex ante investment the trade off between these two effects the substitution effect and the output effect can lead to an inverted u shaped relationship between ex ante investment and product liability we find that the firm always prefers full liability whereas consumers might be better off with less than full liability full product liability tends to be socially optimal when the potential consumer loss from low quality is sufficiently high otherwise partial liability can be socially optimal

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

socio political factors and the failure of innovation policy in croatia as a country in transition abstract this paper discusses the roles of socio political factors and related public policies in the economic growth of croatia as well as their influence on its transition to a knowledge economy ke the croatian experience might help to understand transition processes in other central and eastern european countries ceecs this paper argues that croatia has failed to capitalize on its inherited science base which could have been used as a starting point in the transition towards a ke because it has not made the shift from an obsolete socialist style science policy to a modern innovation policy ip the latter is seen as the new policy paradigm necessary for structural adjustment to a ke covert socio political growth factors shaped by the country specific historical heritage of croatia have prevented the recognition of the need for structural adjustment to the new technology regime and have led to the belief that the ip is not only irrelevant but is also a relict of the state interventionism inherited from socialism which was the most serious obstacle to policy reform examples drawn from the development of the ip and the national system of innovation nsi in croatia which shares the socialist model of science policy and the socio political context of the transition towards a market economy with other ceecs can help to explain the failure of the ip in the croatian case the decisive factors were the social state of so called semi modernism and the governance of the so called de industrializing elite this paper concludes that the transition of a ceec from a market economy to a ke requires a serious re design of development policy the effectiveness of which depends on social change determined by the political recognition and social assimilation of the new technological regime in this sense the current paper contributes to the understanding of the roles of social capital and governance in the economic growth of post socialist countries

multiple market entry cost signalling and entry deterrence a low cost incumbent may limit price to informatively signal her cost to an uncertain potential entrant and therefore deter entry we enrich this model by investigating the strategic pricing behavior of the incumbent when she operates in multiple markets we demonstrate that the low cost incumbent s ability to separate from a ghost high cost type is enhanced when she combines her signalling effort across markets instead of independent signalling in each market we show that in the combined least cost signalling the low cost incumbent limit prices in each market in an attempt to minimize dissipative but informative signalling costs the low cost incumbent may enter unprofitable markets but exit after credible separation

warranties as signals under consumer moral hazard this article examines the use of prices and warranties as signals of product quality to consumers who choose how to maintain their purchases the seller s incentives are strongly affected by the interaction of quality and maintenance in determining product reliability two different assumptions about this interaction are made a separating equilibrium in which high quality is signalled with a low warranty and low price is shown to be possible in both cases

umbrella branding as a signal of new product quality an example of signalling by posting a bond i present a signalling model in which a multiproduct firm can use its reputation as a bond for quality by using a brand name for an established product when it introduces a new experience good as out of equilibrium beliefs are specified a false signal may be taken to imply that both the established and the new product are of low quality in contrast the absence of a signal leaves open the possibility that one of the two products is of high quality hence the signal can be credible without excessive sunk costs as long as the bond posted is sufficiently large

consumer learning brand loyalty and competition in several markets consumers can gain further information regarding how well a product fits their preferences only by experiencing it after purchase this could then generate loyalty for the products tried first this paper considers a model in which consumers learn in the first period about the product they buy and then make choices in the second period about the competing products given what they learned in the first period the paper finds that if the distribution of valuations for each product is negatively positively skewed a firm benefits is hurt in the future from having a greater market share today the brand loyalty characteristic with negative skewness two effects are identified on one hand marginal forward looking consumers are less price sensitive than myopic consumers and this is a force toward higher prices on the other hand forward looking firms realize that they gain in the future from having a higher market share in the current period and compete more aggressively in prices for similar discount factors for consumers and firms the latter effect dominates the paper also characterizes the importance of consumer learning effects on the market outcome

optimal sales contracts with withdrawal rights we introduce ex post participation constraints in the standard sequential screening model this captures the presence of consumer withdrawal rights as for instance mandated by european union regulation of distance sales contracts with such additional constraints the optimal contract is static and unlike with only ex ante participation constraints does not elicit the agent s information sequentially this holds whenever differences in ex ante and ex post outside options are below a positive upper bound welfare effects of mandatory withdrawal rights are ambiguous since it is insufficient in our setting to consider only local incentive constraints we develop a novel technique to identify the relevant global constraints

price uncertainty and consumer search a structural model of consideration set formation we offer an econometric framework that models consumer s consideration set formation as an outcome of her costly information search behavior because frequently purchased products are characterized by frequent price promotions of varying depths of discounts a consumer faces significant uncertainty about the prices of the brands the consumers engage in a fixed sample search strategy that results in their discovering the posted prices of a subset of the available brands this subset is referred to as the consumer s consideration set the proposed model is estimated using the scanner data set for liquid detergents our key empirical results are i consumers zincur significant search costs to discover the posted prices of the brands ii whereas in store displays and feature ads do not influence consumers quality perceptions of the brands they significantly reduce search costs for observing the prices of the brands iii per capita income of consumer s household significantly increases her search costs and iv the consumers price sensitivity is seriously underestimated if we were to assume that consumers get to know all the posted prices at zero cost the proposed model is also estimated for the ketchup category to enable us to do cross category comparisons of consumers price search behavior

advertising and limit pricing we enrich milgrom and roberts 1982 limit pricing model to allow an incumbent to signal his costs with both price and advertisements our fundamental result is that a cost reducing distortion occurs in that the incumbent behaves as if there were complete information but his costs were lower than they are preentry price is therefore distorted downward and demand enhancing advertising is distorted upward as a consequence of signalling if advertising is a purely dissipative signal it is not used nor therefore distorted recent refinements of the sequential equilibrium concept are featured