bluuebunny/crossref_metadata_2025 huggingface dataset:
Nonlinear Pricing in Markets with Interdependent Demand
Authors: Oren Shmuel S. , Smith Stephen A. , Wilson Robert B.
Published: October 2008

This paper provides a mathematical framework for modeling demand and determining optimal price schedules in markets which have demand externalities and can sustain nonlinear pricing. These fundamental economic concepts appear in the marketplace in the form of mutual buyers' benefits and quantity discounts. The theory addressing these aspects is relevant to a wide variety of goods and services. Examples include tariffs for electronic communications services, pricing of franchises, and royalty fees for copyrighted material and patents. This paper builds on several previous results from microeconomics and extends nonlinear pricing to markets with demand externalities. The implications of this price structure are compared to results obtained for flat rates and two part tariffs in a similar context. A case study is described in which the results were applied to planning the startup of a new electronic communications service.
Technical Note—The Effect of Grouping Continuous Variables on Correlation Coefficients
Authors: Morrison Donald G. , Toy Norman E.
Published: October 2008

The purpose of this note is to supplement some recent articles which discuss correlations between two grouped random variables. In this paper we give a more parsimonious and less computationally complex method of assessing the effect of grouping while also giving some insights into the best ways to group continuous variables. Implications of these results for certain marketing studies are given.
Innovation Diffusion in the Presence of Supply Restrictions
Authors: Jain Dipak , Mahajan Vijay , Muller Eitan
Published: October 2008

Innovation diffusion models are developed to represent the spread of a new product from its manufacturer(s) to its ultimate users. In the marketplace, however, the growth of a new product can be retarded by supply restrictions such as the unavailability of the product due to limitations on the production capacity or difficulties encountered in setting up distribution systems. In the presence of supply restrictions, diffusion models must be developed to capture the dynamics of supply restrictions and to allow management to evaluate the impact of such supply restrictions on the growth of a new product in the market place. Based on the Bass innovation diffusion model, the objective of this paper is to suggest a parsimonious diffusion model that integrates the demand side dynamics with the supply side restrictions. The sensitivity of innovation diffusion patterns in the presence of supply restrictions is examined. An application examining the diffusion of new telephones in Israel is documented to illustrate the usefulness of the proposed model.
Evaluating the Impact of Advertising Media Plans: A Model of Consumer Purchase Dynamics Using Single-Source Data
Authors: Pedrick James H. , Zufryden Fred S.
Published: October 2008

We propose a model to analyze the impact of advertising media plans and point-of-purchase marketing variables on a brand's market performance. Our model integrates brand choice, purchase incidence, and exposure behavior within a nonstationary stochastic framework. Moreover, it considers various aspects of consumer heterogeneity including individual differences in loyalty levels, purchase rates, and exposure probabilities for a population of consumers. The integrated model provides a relationship of advertising exposures from media plans, and other marketing variables, to measures of a brand's performance that include market share, penetration and depth of repeat patterns over time. In this paper, we focus on a multi-brand model formulation and stress its application to the analysis of advertising media plans. Based on single-source UPC scanner panel data for a frequently purchased product category, we provide an empirical test of the model. In this context, our analyses show that the model provides a good fit to the empirical data as well as accurate forecasts in hold-out predictive tests.
An Empirical Analysis of the Relationship Between Brand Loyalty and Consumer Price Elasticity
Authors: Krishnamurthi Lakshman , Raj S. P.
Published: October 2008

This empirical paper explores the relationship between consumer brand preference or loyalty and price elasticity in purchase behavior. This behavior is conceptualized as resulting from two distinct but related decisions, namely a brand choice decision and a purchase quantity decision. We argue that loyal consumers will be less price sensitive in the choice decision than nonloyal consumers. However, this direction is expected to be reversed in the quantity decision with loyal consumers expected to be more price sensitive than nonloyal consumers.

We model the choice and quantity decisions jointly using the limited dependent variable framework described in Krishnamurthi and Raj. The data used are diary panel data on a frequently purchased product class from BURKE and caffeinated ground coffee scanner data from IRI. We show that loyals are less price sensitive than nonloyals in the choice decision but more price sensitive in the quantity decision. Managerial implications of the differing elasticities are discussed.
Estimating Heterogeneity in Consumers' Purchase Rates
Authors: Gupta Sunil , Morrison Donald G.
Published: October 2008

Consumers are different in their purchase rates and it is important to determine this heterogeneity. If a consumer's purchases follow a Poisson process (hence exponential interpurchase time), and purchase rates are distributed gamma across consumers, then a simple measure of heterogeneity is the shape parameter r of the gamma distribution. Although we can use either the number of purchases or the interpurchase time data to estimate this heterogeneity, we suggest that number of purchases data are better and easier to use. It is also suggested that while method of moments (MOM) gives good parameter estimates for models using number of purchases data (e.g. NBD), it may be very misleading for models using interpurchase time data (e.g. Pareto). We also recommend caution when using maximum likelihood estimation procedure for the interpurchase time data if multiple observations are available for each consumer. This is to ensure that the model captures heterogeneity across consumers and not across observations.
Price Competition in a Channel Structure with a Common Retailer
Authors: Choi S. Chan
Published: October 2008

In recent studies of channel competition, it has been found that channel intermediaries reduce the intensity of direct competition between manufacturers. The underlying channel structure in most studies consists of two manufacturers and two retailers each of whom sells only one manufacturer's product exclusively. This paper adds to this growing literature of channel competition by analyzing a channel structure with two competing manufacturers and one intermediary (a common retailer) that sells both manufacturers' products. Unlike some exclusive dealers or retail outlets of a manufacturer, however, a common retailer is often a powerful player in the market. This paper studies three noncooperative games of different power structures between the two manufacturers and the retailer, i.e., two Stackelberg and one Nash games. It is shown that some of the results depend critically on the form of the demand function. With a linear demand function, a manufacturer is better off by maintaining exclusive dealers while a retailer has an incentive to deal with several producers. All channel members as well as consumers are better off when no one dominates the market. The common retailer benefits more than the manufacturers do from a symmetric decrease in the manufacturing cost. As products are less differentiated, all channel members' prices and profits increase: a counterintuitive result. When the demand function is nonlinear, however, an exclusive dealer channel provides higher profits to all than a common retailer channel given a power structure. As products are more differentiated, a manufacturer's profit decreases when a common retailer is used, but increases when an exclusive dealer is used. These results underscore the importance of choosing a correct demand function for a channel decision.
Effects of Price Promotions on Variety-Seeking and Reinforcement Behavior
Authors: Kahn Barbara E. , Raju Jagmohan S.
Published: October 2008

A stochastic model is proposed to examine how changes in frequency of price discounts affect brand choice decisions of consumers who exhibit variety-seeking and reinforcement behavior. It is shown that the effect on choice depends on whether the brand offering discounts is a major or minor brand in the product category. This model extends the existing literature on stochastic models of variety-seeking behavior by explicitly incorporating switching due to promotions along with intrinsic switching due to variety-seeking. The model yields testable hypotheses which are supported in a laboratory experiment and on analyses of the IRI cracker data.
New Brand Positioning and Pricing in an Oligopolistic Market
Authors: Horsky Dan , Nelson Paul
Published: October 2008

The positioning and pricing of a new brand requires knowledge about the relationship of both demand and cost with potential attribute locations and prices. This paper addresses this problem and illustrates it in the context of the automobile market. Multi-attribute expected utility theory which allows for consumer uncertainty about the brands is used to model individuals' behavior. Attribute weights are estimated from market survey data on brands' attributes and preferences using LINMAP as an estimation procedure. Expected utility is then updated using the multinomial logit model and choice data to account for the observation that stated preferences do not perfectly reflect the eventual choice. It is hypothesized that when faced with an actual choice price may become more important to the consumer, while other attributes may become more or less important than is reflected in stated preferences. The resulting estimated choice probabilities are aggregated to form demand functions facing each brand which depend on all brands' prices and attribute space locations. Assuming there is a price equilibrium in the existing market and that firms have the same variable cost function, variable costs as a function of a brand's attribute levels are estimated. Given the demand and cost functions facing each firm including the potential new entrant, the profit maximizing positioning and pricing of a new brand is analyzed using a game theoretic approach. A solution is sought under the assumption that incumbents react to entry by changing their prices. Possible approaches to the translation of the perceptual attribute positioning of the new brand to physical and engineering attributes are reviewed. Improvements and future extensions of the study are discussed.
A Dynamic Model of Channel Member Strategies for Marketing Expenditures
Authors: Chintagunta Pradeep K. , Jain Dipak
Published: October 2008

We develop a dynamic model for determining the equilibrium marketing effort levels for a manufacturer and a retailer in a two-member marketing channel. The existence of carry-over effects of marketing effort of channel members leads to an accumulation of goodwill for them over time. This necessitates modeling the relationship between the effort and channel sales in a dynamic framework as goodwill accumulation creates an incentive for channel members to invest in marketing effort in order to obtain future benefits. By explicitly recognizing that each member's decision is affected by the other's actions, we derive their equilibrium effort levels over time when they follow either a coordinated or an uncoordinated strategy and also determine the profit implications of these strategies for the channel members.

We examine the effect of channel dynamics on the difference in profits resulting from following coordinated as opposed to uncoordinated strategies and identify situations in which this profit differential provides an incentive for channel members to coordinate their marketing efforts. Further, we derive empirically testable hypotheses that provide a basis for predicting when channel coordination would take place in a dynamic context.
A Probit Model of Choice Dynamics
Authors: Papatla Purushottam , Krishnamurthi Lakshman
Published: October 2008

There are many products which are repeatedly purchased by consumers. In such cases it is likely that choice history, that is the sequence of choices made in the past, as well as marketing variables affect subsequent choice decisions. Attempts to model the effects of choice history have been generally based on the inclusion of variables that represent brand loyalty and/or variety seeking behavior. In this paper we present a model of dynamic choice behavior which is more general and incorporates four characteristics. The first characteristic labeled preference reinforcement and preference reduction represents loyalty and variety seeking. The second is the short-term reluctance of a consumer to move from the current brand (inertia) or the willingness to move to another brand (mobility). The third characteristic captures the effect of repetitive consumption (the long term effect) on inertia and mobility. The fourth characteristic incorporates the similarity or dissimilarity of choice alternatives. This is important in a dynamic model because choice on the current purchase occasion can be affected by whether a similar or dissimilar alternative was chosen on the previous occasion. Similarities of alternatives are represented in terms of distances. The effect of price on choice behavior is also modeled.

Individual-level purchase data from a consumer panel are used to estimate a covariance probit and an independent probit specification of the model. From a substantive perspective the model gives interesting insights into the dynamics of choice behavior. The model predicts switches better than a benchmark model which incorporates only loyalty. In addition, it is superior to three benchmark models in overall predictive ability.
Pulsing Policies for Aggregate Advertising Models
Authors: Feinberg Fred M.
Published: October 2008

Classical continuous-time models of advertising expenditure tend to fall into two categories, those that prescribe spending at a constant level and those that prescribe switching infinitely quickly between several different levels of spending. The latter practice, chattering, though impossible literally, can be interpreted in practice to imply that the faster the switching the better. Empirical evidence, however, sometimes suggests the superiority of pulsing, alternating between different spending levels with finite frequency, for example in a periodic fashion. Furthermore, the actual behavior of marketing managers, who often advertise in flights or pulses, appears to differ from the optimal policies many current models prescribe.

Showing how structural properties of common advertising models rule out finite-frequency pulsing a priori, we develop a continuous-time model for which finite-frequency pulsing can be optimal. Relaxing these structural assumptions yields a new class of models which, for certain values of their parameters, lead to periodic pulsing optima; this is accomplished by inclusion of both S-shaped response and an exponential-smoothing filter. These theoretical results are illustrated through simulation of a variant of the Vidale-Wolfe model.
The Dynamic Pricing of Next Generation Consumer Durables
Authors: Bayus Barry L.
Published: October 2008

Learning curve effects, aspects of consumer demand models (e.g., reservation price distributions, intertemporal utility maximizing behavior), and competitive activity are reasons which have been offered to explain why prices of new durables decline over time. This paper presents an alternative rationale based on the buying behavior for products with overlapping replacement cycles (i.e., next generation products). A model for consumer sales of a new durable is developed by incorporating the replacement behavior of a previous generation product. Pricing strategies for two product generations are investigated analytically and with numerical methods. Results indicate that durable replacement behavior leads to a wider set of optimal pricing strategies than previously obtained. Several empirical illustrations of industry pricing practices for successive product generations are also shown to be consistent with the theoretical results. Finally, various areas for future research are outlined.
An Aggregate Advertising Pulsing Model with Wearout Effects
Authors: Mesak Hani I.
Published: October 2008

This paper, guided by empirical findings in the literature, develops an advertising pulsing model for established frequently purchased products under the presence of advertising wearout effects. Using such a model, the superiority of Advertising Pulsing Policy over an equivalent Uniform Advertising Policy is explored analytically for both S-shaped and concave advertising response functions in relation to initial sales and the employed discount rate.

The basic results of the research, summarized in four propositions, indicate that under the presence of advertising wearout and for both S-shaped and concave advertising response functions that:

—Pulsing is superior to the even policy for a zero discount rate.

—For all positive values of the discount rate, pulsing is superior to the even policy provided that initial sales are close enough to the equilibrium sales of the even policy.

—If initial sales are much different from the equilibrium sales of the even policy, pulsing would be superior for small values of the discount rate whereas the even policy would be superior for large values of the discount rate.
Demand Signalling and Screening in Channels of Distribution
Authors: Chu Wujin
Published: October 2008

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.
Estimating a Multinomial Probit Model of Brand Choice Using the Method of Simulated Moments
Authors: Chintagunta Pradeep K.
Published: October 2008

The multinomial probit model of brand choice is theoretically appealing for marketing applications as it is free from the “independence of irrelevant alternatives” property of the multinomial logit model. However, difficulties in estimation have restricted its widespread use in marketing. This paper presents an application of the method of simulated moments, a new methodology that enables easy estimation of probit models with a large number of alternatives in the choice set. We describe the theoretical development of the technique and using pseudo-simulated data, conduct numerical experiments to compare the method with existing techniques for estimating probit models.

Using the scanner panel data on the purchases of catsup, we provide an empirical application of the method of simulated moments to the estimation of the parameters of a multinomial probit model. Estimating the covariance structure associated with the underlying latent variable probit model enables us to identify broad patterns of similarities across alternatives. It also enables us to derive a pairwise similarity matrix across choice alternatives which when input into a multi-dimensional scaling routine provides us with a graphical representation of competitive structure in the catsup market. For completeness, we compare the substantive implications for the effects of marketing variables obtained from the multinomial probit model with those obtained from models in the extant marketing literature.
An Empirical Pooling Approach for Estimating Marketing Mix Elasticities with PIMS Data
Authors: Ramaswamy Venkatram , Desarbo Wayne S. , Reibstein David J. , Robinson William T.
Published: October 2008

The PIMS (Profit Impact of Marketing Strategies) data entail sparse time-series observations for a large number of strategic business units (SBUs), In order to estimate disaggregate marketing mix elasticities of demand, a natural solution is to pool different SBUs. The traditional, a priori approach is to pool together those SBUs which one believes in advance to be very similar with respect to their marketing mix elasticities. We propose an alternative maximum likelihood, latent-pooling method for simultaneously pooling, estimating, and testing linear regression models empirically. This method enables the determination of a “fuzzy” pooling scheme, while directly estimating a set of marketing mix elasticities and intertemporal covariances for each pool of SBUs. Our analyses reveal different magnitudes and patterns of marketing mix elasticities for the derived pools. Pool membership is influenced by demand characteristics, business scope, and order of market entry.
The Measurement and Determinants of Brand Equity: A Financial Approach
Authors: Simon Carol J. , Sullivan Mary W.
Published: October 2008

This paper presents a technique for estimating a firm's brand equity that is based on the financial market value of the firm. Brand equity is defined as the incremental cash flows which accrue to branded products over unbranded products. The estimation technique extracts the value of brand equity from the value of the firm's other assets.

This technique is useful for two purposes. First, the macro approach assigns an objective value to a company's brands and relates this value to the determinants of brand equity. Second, the micro approach isolates changes in brand equity at the individual brand level by measuring the response of brand equity to major marketing decisions.

Empirically, we estimate brand equity using the macro approach for a sample of industries and companies. Then we use the micro approach to trace the brand equity of Coca-Cola and Pepsi over three major events in the soft drink industry from 1982 to 1986.
Scale and Scope Effects on Advertising Agency Costs
Authors: Silk Alvin J. , Berndt Ernst R.
Published: October 2008

Economies of scale are evident when a firm's average costs decline while its output expands, as when an advertising agency raises its gross income by serving more accounts and/or larger accounts. Economies of scope appear when cost savings can be realized by a single agency producing several products jointly, as compared to many agencies each producing them separately. How important are economies of scale and scope in advertising agency operations? In this paper cost models are formulated which represent how the principal component of agency costs, employment level, varies according to the mix of media and services an agency provides and the total volume of advertising it produces. These models are estimated and tested cross-sectionally utilizing data pertaining to the domestic operations of 401 U.S. agencies for 1987.

The empirical evidence reported here indicates that both scale and particularly scope economies are highly significant in the operations of U.S. advertising agencies. We find that of the 12,000 establishments comprising the industry in 1987, approximately 200–250 had domestic gross incomes of $3–4 million or more (or equivalently, billings of $20–27 million) and therefore had service mixes and operating levels sufficiently large to take full advantage of all available size-related efficiencies. Furthermore, the overall structure of the industry is one where these large, fully efficient firms created and produced more than half of all the national advertising utilized in the U.S. during 1987. At the same time, vast numbers of very small agencies appear to operate with substantial cost disadvantages compared to large firms as a consequence of these scale and scope economies.

These findings carry important implications concerning possible future changes in the industry structure. It seems highly doubtful that scale economies could motivate further mergers among the largest 200–250 agencies. On the other hand, for small agencies, mergers and acquisitions might be attractive as means of mitigating their size-related cost disadvantages. Finally, our findings demonstrating the existence of scale and scope economies are consistent with the diminishing reliance on fixed rates of media commissions as the principal basis of agency compensation. They also cast strong doubts on size-related economies in operating costs as a viable explanation for the limited degree of vertical integration of agency services by large advertisers.
Predicting Advertising Pulsing Policies in an Oligopoly: A Model and Empirical Test
Authors: Villas-Boas J. Miguel
Published: October 2008

Given that firms pulse in advertising, should firms pulse in or out of phase? It is shown that out of phase maximizes the oligopoly profits and is also the Markov perfect equilibrium of the infinite horizon game. The basic intuition for this result comes from the following fact: it is more profitable to increase consideration when the competitor's consideration is lower.

Evidence from several product categories seems to support this theoretical result.
The Antecedents and Consequences of Customer Satisfaction for Firms
Authors: Anderson Eugene W. , Sullivan Mary W.
Published: October 2008

This research investigates the antecedents and consequences of customer satisfaction. We develop a model to link explicitly the antecedents and consequences of satisfaction in a utility-oriented framework. We estimate and test the model against alternative hypotheses from the satisfaction literature. In the process, a unique database is analyzed: a nationally representative survey of 22,300 customers of a variety of major products and services in Sweden in 1989–1990. Several well-known experimental findings of satisfaction research are tested in a field setting of national scope. For example, we find that satisfaction is best specified as a function of perceived quality and “disconfirmation”—the extent to which perceived quality fails to match prepurchase expectations. Surprisingly, expectations do not directly affect satisfaction, as is often suggested in the satisfaction literature. In addition, we find quality which falls short of expectations has a greater impact on satisfaction and repurchase intentions than quality which exceeds expectations. Moreover, we find that disconfirmation is more likely to occur when quality is easy to evaluate. Finally, in terms of systematic variation across firms, we find the elasticity of repurchase intentions with respect to satisfaction to be lower for firms that provide high satisfaction. This implies a long-run reputation effect insulating firms which consistently provide high satisfaction.
A Look on the Cost Side: Market Share and the Competitive Environment
Authors: Boulding William , Staelin Richard
Published: October 2008

In this paper we develop a model relating market share to average costs. We start with a theoretical model of the factors that affect the firm's average cost curve, partitioning these factors into (a) measurable firm and competitive environment characteristics, and (b) unobserved factors that are either fixed, random, or follow a first-order autoregressive process. We then link this theoretical model to an empirical model in which we specify three average cost equations for the organizational areas of purchasing, production, and marketing. Main effects for initial (lagged) market share position, as well as their interactions with factors characterizing the firm's competitive environment, represent the variables of key theoretical interest in our equations. We estimate these equations using PIMS data, and control for fixed, contemporaneous, and autoregressive unobservable factors. Our results suggest that market share can often lead to market power in the form of lower average costs. However, the firm's operating environment greatly moderates the effect of market share on average cost. In particular, we find that market share position only leads to lower average costs when the organizational unit operates in a competitive environment that gives it both motivation and ability to realize power from its market share position.
Truth in Concentration in the Land of (80/20) Laws
Authors: Schmittlein David C. , Cooper Lee G. , Morrison Donald G.
Published: October 2008

Among the more prominent truisms in marketing are 80/20 type laws, e.g., 20 percent of the customers account for 80 percent of the purchases. These kinds of statistics indicate a certain degree of concentration in customer purchases; i.e., the extent to which a large portion of the product's total purchases are made by a small fraction of all customers. Such concentration levels, suggesting that markets can be segmented in various ways, are often reported in basic marketing texts.

We show that a meaningful interpretation of these concentration statistics is not nearly as easy or immediate as it is to compute them. The key factors influencing the degree of apparent concentration in purchases are reviewed, and we present a modeling approach for estimating the true level of relevant concentration among customers.
Investigating Purchase Incidence, Brand Choice and Purchase Quantity Decisions of Households
Authors: Chintagunta Pradeep K.
Published: October 2008

We develop a comprehensive utility maximizing framework to study the impact of marketing variables on the category purchase, brand choice and purchase quantity decisions of households for frequently purchased packaged goods. The model allows for dependence among the three decisions while ensuring that these decisions provide, in combination, the greatest possible utility to the household. By accounting for variations in reservation prices and intrinsic brand preferences across households, the modeling framework explicitly captures the effects of unobserved heterogeneity on all three purchase decisions.

The principal empirical finding from analyzing the A. C. Nielsen data for the yogurt product category is that the substantive implications for the effects of marketing variables are sensitive to whether these effects are determined conditional or unconditional on a product category purchase. Our results show that reservation prices and intrinsic brand preferences vary across households, and not accounting for these variations in the estimation could lead to biased estimates for the coefficients of the marketing variables. A comparison of our results to those obtained from a nested logit model of purchase incidence and brand choice reveals that our proposed model performs better using both a formal statistical test as well as the criterion of predictive validity in a holdout sample of panelists. Further, the purchase quantity model compares favorably with two alternative models of quantity choice in the validation sample.
Modeling Multiple Sources of Heterogeneity in Multinomial Logit Models: Methodological and Managerial Issues
Authors: Gönül Füsun , Srinivasan Kannan
Published: October 2008

We offer a framework to specify and estimate various sources of heterogeneity in multinomial logit brand choice models. We let each brand-specific intercept and each parameter of the explanatory variable vector vary randomly across households. In addition, we distinguish loyal households from the rest. Our results suggest that incorporating multiple sources of heterogeneity improves the model fit and suggests higher impact of marketing mix elements on brand choice. We highlight the importance of incorporating multiple sources of heterogeneity. The model we implement yields valuable managerial insights.
Pretesting Questionnaires: Content Analyses of Respondents' Concurrent Verbal Protocols
Authors: Bolton Ruth N.
Published: October 2008

Conventional questionnaire pretesting methods focus on directly identifying question defects, such as an ambiguous question. This paper proposes a new method that identities respondents' cognitive difficulties as they form answers to survey questions. It entails a content analysts of concurrent verbal protocols elicited during pretest interviews. The effectiveness of the methodology is illustrated with pretests of multiple versions of the same survey. The results are used to illustrate how this method yields diagnostic information about questionnaire problems and improvements. Then, the results are compared with the results of observational monitoring by managers. The findings indicate that a questionnaire pretesting methodology that quantifies respondents' cognitive difficulties is a useful enhancement for identifying and “improving” defective questions.
Accounting for Heterogeneity and Nonstationarity in a Cross-Sectional Model of Consumer Purchase Behavior
Authors: Fader Peter S. , Lattin James M.
Published: October 2008

When calibrating a brand choice model cross-sectionally, a measure of brand loyalty is often introduced into the utility function to account for differences in utility across households and over time. One of the most widely used measures of brand loyalty, proposed by Guadagni and Little (1983), is an exponential smoothing model of past choice behavior by the household. In this study, we argue that the exponential smoothing model of brand loyalty cannot properly distinguish between sources of variation in utility due to heterogeneity (across households) and sources of variation due to nonstationarity (within household over time). We introduce a new measure of brand loyalty, derived from a nonstationary Dirichlet-multinomial choice model, in which heterogeneity and nonstationarity are handled distinctly.
The Effect of Local Consideration Sets on Global Choice Between Lower Price and Higher Quality
Authors: Simonson Itamar , Nowlis Stephen , Lemon Katherine
Published: October 2008

A set of alternatives under consideration is often divided into subsets (or local sets) by some external (e.g., product display format at the store) or internal (e.g., a decision rule) factor. We propose that the manner in which a global set of alternatives varying in price and quality is divided into local sets can have a systematic effect on consumer choice between a lower price alternative and a higher quality alternative. Three such effects are investigated: (1) Consumers who first choose from pairs of products ({A, B}, {B, C}, {A, C}) and then choose from the set of all three products ({A, B, C}) are more likely to prefer the cheapest alternative than consumers who only choose from the complete set; (2) The choice share of a low-price, low-quality brand is greater when alternatives varying in price, quality, and features are displayed by brand (i.e., each display presents different models of one brand) as compared to a display by feature level (i.e., each display presents comparable models of different brands); and (3) Consumers considering a pair of two-option local sets, each consisting of different brands and feature levels (e.g., a feature enhanced model of a low quality brand vs. a basic model of a high quality brand), are more likely to select a feature enhanced model from the global set (of four options) than those who consider the same alternatives in other local set configurations or consider only the global set. These predictions were supported in seven studies, which also provided insights into the boundaries of the effects (focusing on the paired-comparison effect). We discuss the theoretical and practical implications of the findings.
Modeling Loss Aversion and Reference Dependence Effects on Brand Choice
Authors: Hardie Bruce G. S. , Johnson Eric J. , Fader Peter S.
Published: October 2008

Based upon a recently developed multiattribute generalization of prospect theory's value function (Tversky and Kahneman 1991), we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points, and that consumers weigh losses from a reference point more than equivalent sized gains (loss aversion). We sketch implications of this model for understanding brand choice.

We develop a multinomial logit formulation of a reference-dependent choice model, calibrating it using scanner data. In addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model, the model's coefficients demonstrate significant loss aversion, as hypothesized.

We also discuss the implications of a reference-dependent view of consumer choice for modeling brand choice, demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics, and examine other implications for competitive strategy.
On the Function of Sales Assistance
Authors: Wernerfelt Birger
Published: October 2008

The paper provides a formal rationale for the common practice of using sales assistance. The argument is made in a model where a consumer's situation determines his needs. The products are differentiated and the map identifying the best match between a consumer's situation and a product is known only to the sales assistant. I look at procedure which involves the consumer revealing his needs and the sales assistant identifying the best matching product. This is compared to several other procedures and found to be best when the number of possible consumer situations is large. It is shown that reputational considerations may keep the sales assistant honest. I look at the impact of guarantees and other modifications to the model and discuss normative implications.
Signaling Quality by Selling Through a Reputable Retailer: An Example of Renting the Reputation of Another Agent
Authors: Chu Wujin , Chu Woosik
Published: October 2008

This paper gives an example of renting the reputation of another agent to signal quality. We show that in a “maximally” separating equilibrium, manufacturers of high quality products distribute through retailers with strong reputation (reputable retailers), while manufacturers of low quality products distribute through retailers with no reputation (discounters). In this way, even if high quality manufacturers have no reputation of their own to post as bond, they can signal quality by posting the reputation of the retailers. In equilibrium, reputable retailers never default on their reputation. We also show that it pays the retailers to invest in reputation, as reputable retailers earn profits bounded away from zero under endogenous sequential entry, while the discounters' profits are zero.
Sleeping with the Enemy: Should Competitors Share the Same Advertising Agency?
Authors: Villas-Boas J. Miguel
Published: October 2008

The possibility of account conflicts is generally regarded as a very serious problem in the advertising industry. The problem is that once an advertising agency works for a firm it learns private information which it can use strategically, i.e., make available to the firm's competitors. But, in oligopolistic situations, knowing more about a competitor may not necessarily be beneficial, because the competitor may react to this knowledge. Similarly, allowing the competitor to have more information may not necessarily be detrimental. In fact, the decision of whether to share the same agency depends on three effects, which are identified here: (1) the decision-making framework effect, (2) the strategic effect, and (3) the uncertainty effect. The first effect always favors sharing the same gency. The direction of the latter two effects is ambiguous. This ambiguity is resolved against the sharing of agencies when (1) the competitor's reaction to the firm's situation is especially harmful in that particular situation (strategic effect) and (2) the competitor's actions are increasingly harmful (uncertainty effect).
Selling Formats for Search Goods
Authors: Wernerfelt Birger
Published: October 2008

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.
Nonlinear Pricing to Produce Information
Authors: Braden David J. , Oren Shmuel S.
Published: October 2008

We investigate the firm's dynamic nonlinear pricing problem when facing consumers whose tastes vary according to a scalar index. We relax the standard assumption that the firm knows the distribution of this index. In general the firm should determine its marginal price schedule as if it were myopic, and produce information by lowering the price schedule; “bunching” consumers at positive purchase levels should be avoided.

As a special case we also consider a market characterized by homogeneous consumers with a static, but unknown, demand curve. We show that when there are repeat purchases the forward-looking firm should tend towards penetration pricing; otherwise its strategy should tend towards skimming. We extend our insights to more general settings and discuss implications for pricing product lines.
The Impact of Dealing Patterns on Purchase Behavior
Authors: Krishna Aradhna
Published: October 2008

We explore the effect of dealing patterns on consumer purchase behavior by developing a normative purchase quantity model that can incorporate any dealing pattern. The model adds to the stream of research on optimal purchasing policy by demonstrating how dealing patterns can be incorporated in a simple manner in dynamic programming models. Implications for purchase behavior are derived by employing the model in a numerical simulation in which time between deals is characterized by a Weibull distribution. The flexibility of the Weibull distribution enables us to establish how particular facets of the dealing distribution (e.g., certainty in deal timing, minimum time between deals) affect consumer behavior with respect to optimal purchase quantity, inventory, etc. One of the implications of the model is that the average quantity purchased on deal should be larger when there is greater certainty in deal timing. The model also shows that the average quantity purchased on deal should be larger when deals are spaced further apart. even though the buyer is presented with the same number of deals. We test certain model implications in a laboratory experiment and find actual behavior varying across dealing patterns in a manner consistent with model implications.
Adoption, Transfers, and Incentives in a Franchise Network with Positive Externalities
Authors: Nault Barrie R. , Dexter Albert S.
Published: October 2008

We study franchise arrangements that allow franchisees with exclusive territories to own their customers. This permits franchisees to benefit from positive externalities in the franchise network through interfranchise transfers based on the purchases by their customers at other franchises on the network. Using the structure of a single franchisor and many franchisees, we show that, in general, interfranchise transfers between franchisees and incentives for franchisee investment in the expansion of their customer base are critical both to the size and to the benefits derived from the franchise network. Specifically, we find that when individual franchisees make investments in marketing effort to increase their customer base, the franchisor's setting of the interfranchise transfer trades off the positive effects on network size with the negative effects of removing franchisee incentive for investment. This result is due to the fact that interfranchise transfers encourage adoption, but discourage full investment in marketing effort. As compared to first-best franchisee investment, use of the royalty and the inter-franchise transfer directly dissipates franchisee profits, and indirectly dissipates franchisee profits through less than universal adoption, thereby causing franchisees to underinvest. As compared to traditional franchise systems, however, use of the interfranchise transfer results in franchises making greater investments than they otherwise would.
Competing Coupon Promotions and Category Sales
Authors: Chiang Jeongwen
Published: October 2008

Recent reports show that manufacturers in many consumer product industries continue to use coupons as one of their main promotional tools. The rising intensity of coupon competitions, however, makes the issue of having better measures for coupon effects ever more important. This paper proposes a method to assess the category expansion effect in an environment where rival brands distribute coupons repeatedly over a period of time. A consumer utility maximization model is presented in which the decision of coupon use is endogenized along with the demand decision. Using single-source detergent data as benchmark, the proposed model is an advance over the conventional regression model in that the latter tend to produce upward-biased estimations for the category impact of coupons.
The Impact of Reference Price Effects on the Profitability of Price Promotions
Authors: Greenleaf Eric A.
Published: October 2008

This paper investigates the impact of reference price effects on retailer price promotions and describes why these effects can make promoting profitable. First, we analyze the profit impact of reference price effects generated by a single period of promotion. The promotion can increase profit if the gain that these effects create in the promotion period outweighs the loss they create in future periods. We then describe how retailers can estimate the optimal strategy of recurring promotions that maximizes profits from reference price effects over a time horizon. Examples of such strategies are presented for a retailer selling a national brand of peanut butter. We obtain insights into how promotion prices, timing, and profits are affected by changes in costs, interest rates, consumers' reactions to reference price effects, and error in estimates used in the model. The retailer's optimal reaction to a trade deal is also examined. This strategy involves a phase of increased promotion activity sandwiched between phases of decreased activity. We explain these results using the effects described in the single-period model.
Empirical Generalizations About the Impact of Advertising on Price Sensitivity and Price
Authors: Kaul Anil , Wittink Dick R.
Published: October 2008

Consumers' sensitivities to price changes are an important input to strategic and tactical decisions. It has been argued that price sensitivities depend on factors such as advertising. Prior studies on the effect of advertising on consumer price sensitivity have found seemingly conflicting results. We analyze the characteristics of previous studies in marketing and generate a set of three empirical generalizations. These are (1) an increase in price advertising leads to higher price sensitivity among consumers, (2) the use of price advertising leads to lower prices, and (3) an increase in nonprice advertising leads to lower price sensitivity among consumers. These generalizations have important implications for managers and researchers. Managers need to coordinate their advertising and pricing decisions to attain maximum profits. For researchers, our summary and discussion of empirical results provide directions for future.