The Role of Information in Marketing Strategy

This dissertation studies the role of information in marketing strategy. Specifically, it focuses on two key questions: How can consumers optimize their information search behavior to make better decisions? And in response to this, how can firms increase their profits by influencing consumers' information acquisition processes? The dissertation consists of three chapters of independent work./nConsumers frequently search for information before making decisions. Since their search and purchase decisions depend on the information environment, firms have a strong incentive to influence it. In the first essay, I endogenize the consumer’s information environment from the firm’s perspective. We consider a dynamic model where a firm sequentially persuades a consumer to purchase the product. The consumer only wishes to buy the product if it is a good match. The firm designs the information structure. Given the endogenous information environment, the consumer trades off the benefit and cost of information acquisition and decides whether to search for more information. Given the information acquisition strategy of the consumer, the firm trades off the benefit and cost of information provision and determines how much information to provide. This paper characterizes the optimal information structure under a general signal space. We find that the firm only smooths information provision over multiple periods if the consumer is optimistic about the product fit before searching for information. Moreover, if the search cost for the consumer is high, the firm designs the information such that the consumer will be certain that the product is a good match and will purchase it after observing a positive signal. If the search cost is low, the firm provides noisy information such that the consumer will be uncertain about the product fit but will still buy it after observing a positive signal./nWhen considering whether or not to buy a product, the consumer can often evaluate different attributes of it. Sometimes, the consumer chooses which attribute to search for because of exogenous reasons (e.g., one attribute is more important than others). However, the consumer often is unclear which attribute is more important ex-ante. Assuming that a product has two symmetric attributes, the second essay characterizes the optimal search strategy of the consumer by endogenizing the optimal attribute to search, when to keep searching for information, and when to stop searching and make a decision. We characterize the search region by a set of ordinary differential equations for moderate beliefs and by a system of equations for extreme beliefs. We find that it is always optimal for the consumer to search the attribute about which she has the higher uncertainty due to the faster speed of learning. The consumer only searches for the more uncertain attribute if she holds a strong prior belief about one of the attributes, and may search for both attributes otherwise. We then show how firms can influence consumers' search behavior and increase profits by informative advertising. The firm does not advertise if the consumer's prior beliefs about both attributes are extreme. Otherwise, the firm advertises the better attribute if the consumer is optimistic enough about the worse attribute, and advertises the worse attribute if the consumer is less optimistic about it./nAs consumers become increasingly concerned about their privacy, firms can benefit from committing not to sell consumer data. However, the holdup problem prevents them from doing so in a static setting. The third essay studies whether the reputation consideration of the firm can serve as a commitment device in a long-run game when consumers have imperfect monitoring technology. We find that a patient enough monopoly can commit because its reputation will be permanently destroyed if consumers observe the data sale. The persistent punishment provides the monopoly a strong incentive not to deviate. In contrast, reputation may fail to serve as a commitment device when there are multiple firms. The penalty for selling data is smaller as consumers cannot know which exact firm sold the data. Also, other firms can hurt the reputation of a particular firm even if it does not sell data. We find some sufficient conditions under which the incentive to deviate is so strong that firms lose the commitment power. Reputation failure in the presence of multiple firms persists when we consider endogenous or asymmetric monitoring.

Advisor: Villas-Boas, J. Miguel