bluuebunny/crossref_metadata_2025_split huggingface dataset:
Why Analyst Overconfidence About the Functional Form of Demand Models Can Lead to Overpricing
Authors: Montgomery Alan L. , Bradlow Eric T. 
Published: October 2008

Generally, profit predictions are made conditional upon a particular functional form. The typical caveat offered is that this is not the “true” demand model, but is instead some reasonable approximation. We show how the notion of an approximation can be explicitly represented using a random coefficient model. Our model nests the usual situation of complete model certainty as a special case. We go on to show how ignoring the uncertainty in functional form induced by approximation will lead to erroneous pricing decisions that may frequently lead to overpricing.For example, an inelastic, double-log demand model implies infinite optimal prices. This is clearly a nonsensical, analyst recommendation. We propose a more general form of the double-log model that allows for high confidence in the observed price range, but incorporates increased uncertainty about the adequacy of the double-log approximation as prices move beyond the observed range. The optimal pricing solutions for this new model are lower than those for the usual case with complete certainty. In fact, we find well-defined optimal pricing solutions even for inelastic double-log demand models. This is a finding of great practical importance, given that aggregate demand models tend to be inelastic for grocery categories, and that log demand models are frequently used (Hoch et al. 1995). We argue that the lack of recognizing uncertainty in the modeling process may partially account for why there is a seeming disparity between observed retail prices and the optimal prices implied by maximizing total category profits using estimated demand models (Little and Shapiro 1980).The problems of making optimal pricing decisions using double-log demand models calibrated with store-level scanner data have been recognized. Previous solutions are to constrain the results to achieve reasonable solutions (Reibstein and Gatignon 1984, Montgomery 1997) or to avoid these models altogether in favor of household choice models aggregated to the store-level (Vilcassim and Chintagunta 1995). Our assessment of the problem is that it is not necessarily an issue of model specification, but one of inference. In other words, double-log models fit well, but optimization leads to out-of-range predictions. Our suggestion is that inferences from an estimated demand model need to be approached with some caution. Specifically, uncertainty about predictions will always exist. If this uncertainty is incorporated into models such as the double-log form, then much better inferences can be made. It is our hope that this research will encourage others to think not only about model specification and estimation, but also inference.
Research Note: Overselling with Opportunistic Cancellations
Authors: Biyalogorsky Eyal , Carmon Ziv , Fruchter Gila E. , Gerstner Eitan 
Published: October 2008

In many business sectors such as airlines, hotels, trucking, and media advertising, customers' arrivals and willingness to pay are uncertain. Managers must decide whether to quote a price low enough to guarantee early sales, or to quote a higher price and risk that some units remain unsold. In allocating capacity, they face a trade-off between two types of potential losses; (1) Yield loss—selling at a low price, and losing a better price later, and (2) Spoilage loss—waiting in vain to sell at a high price, and losing the opportunity of an earlier low price offer. Yield loss means that consumers who value the product most do not get to use it, and spoilage loss means that valuable products are wasted because no consumers get to use them. Sellers typically hedge against the risk of spoilage loss by selling some units early at low prices, and against the risk of yield loss by blocking some units in hope of selling them later at a high price. In this paper we show that the use of overselling with opportunistic cancellations can increase expected profits and improve allocation efficiency. Under this strategy, the seller deliberately oversells capacity if high-paying consumers show up, even when capacity is already fully booked. The seller then cancels the sale to some low-paying customers while providing them with appropriate compensation. We derive a new rule to optimally allocate capacity to consumers when overselling is used, and show that overselling helps limit the potential yield and spoilage losses. Yield loss is reduced because the seller can capture more high-paying customers by compensating low-paying customers who give up their right to the product. Spoilage loss is reduced because the compensation decreases the price spread perceived by the seller, and as a result, the seller is less anxious to speculate and “block” units. Overselling with opportunistic cancellations assures that the product will be sold to consumers who value it most. This means that “everybody wins”, and resources are allocated more efficiently than in conventional selling.
Defensive Marketing Strategies
Authors: Hauser John R. , Shugan Steven M. 
Published: October 2008

This paper analyzes how a firm should adjust its marketing expenditures and its price to defend its position in an existing market from attack by a competitive new product. Our focus is to provide usable managerial recommendations on the strategy of response. In particular we show that if products can be represented by their position in a multiattribute space, consumers are heterogeneous and maximize utility, and awareness advertising and distribution can be summarized by response functions, then for the profit maximizing firm: it is optimal to decrease awareness advertising, it is optimal to decrease the distribution budget unless the new product can be kept out of the market, a price increase may be optimal, and even under the optimal strategy, profits decrease as a result of the competitive new product. Furthermore, if the consumer tastes are uniformly distributed across the spectrum a price decrease increases defensive profits, it is optimal (at the margin) to improve product quality in the direction of the defending product's strength and it is optimal (at the margin) to reposition by advertising in the same direction. In addition we provide practical procedures to estimate (1) the distribution of consumer tastes and (2) the position of the new product in perceptual space from sales data and knowledge of the percent of consumers who are aware of the new product and find it available. Competitive diagnostics, such as the angle of attack, are introduced to help the defending manager.
Optimal Price Subsidy Policy for Accelerating the Diffusion Of Innovation
Authors: Kalish Shlomo , Lilien Gary L. 
Published: October 2008

Due to the risk inherent in dependence on foreign oil, there is a social benefit in aiding the introduction of alternative energy sources into the market place. The Federal government has initiated a number of programs, including price subsidies, to help accelerate the market diffusion of new, alternative energy systems. We develop a model to investigate analytically the effects of a price subsidy over time on the rate of market diffusion. The model considers word-of-mouth effects and learning curve cost declines. Under a set of conditions that a new technology should be expected to meet before commercialization, the optimal subsidy level is shown to be nonincreasing in time. The related market price is shown to be closely related to the diffusion effect. If there is no such effect, the price to the customer is constant. If there is positive diffusion effect, price increases in time, while if market saturation causes demand to decline over time price decreases in time.
Prediction of Individual Buying Behavior: A Poisson-Bernoulli Model with Arbitrary Heterogeneity
Authors: Dalal S. R. , Lee J. C. , Sabavala D. J. 
Published: October 2008

Patterns of customer purchases are often modeled as discrete behavioral events following some probability law. These stochastic models have been applied separately to the phenomena of product class purchase incidence and brand choice (conditional on the products being purchased). Most of these models are probability mixture models where the parameters of an individual customer model vary across the population according to some distribution. This paper proposes a simple model of purchase behavior at the individual level, Poisson (λ) product purchases and Bernoulli (p) brand choices, so that λ and p characterise each customer. However, λ and p may vary jointly across the population in an arbitrary fashion. Therefore, purchase incidence and brand choice are treated together making no assumptions about the dependence between them. This generality is obtained at the cost of efficiency but enables us to focus on the individual behavior. Estimators (with known asymptotic properties) are developed for predicting future purchasing behavior of individuals conditional on their past purchasing behavior. These predictions of future purchases, at brand and product levels, are of interest to marketing managers. For example, what is the expected number of brand (or product) purchases in period 2 for the group of customers that made x brand and n product purchases in period 1? Apart from the basic insights provided by such predictions, they are particularly useful in evaluating the impact of marketing efforts. The model and the estimation results are applied to a frequently purchased product and compared with other stochastic approaches. While this paper focuses on buying behavior, the model is applicable to accidents, direct mail purchases and other random events.
Salesforce Compensation Plans: An Agency Theoretic Perspective
Authors: Basu Amiya K. , Lal Rajiv , Srinivasan V. , Staelin Richard 
Published: October 2008

A theory of salesforce compensation plans is presented where the sales of a product depend not only on the salesperson's effort but also on the uncertainty in the selling environment. The firm chooses a compensation plan to maximize its profit taking into account the salesperson's likely effort levels under alternative compensation plans and his or her alternative job opportunities. The salesperson (agent) chooses an effort level considering both the disutility from effort and the expected utility from earnings under the compensation plan. The Agency Theory framework provides an explanation for the differences across firms in the types of compensation plans used such as straight salary, straight commissions, or a combination of salary and commissions. It is shown that the optimal compensation plan is a convex (concave) increasing function of sales if the risk tolerance of the salesperson increases “rapidly” (stays constant) with income. We identify several structural parameters that affect the compensation plan and show that the implication of changes in some of these parameters is consistent with those mentioned in the sales management literature. For example, we show that the proportion of salary to total compensation would increase with an increase in one or more of the following parameters: (i) uncertainty, (ii) marginal cost of production, and (iii) attractiveness of alternative job opportunities for the salesperson. We conclude with a discussion of the implications of the theory for managing salesforce compensation plans.
A Nested Logit Model of Space and Water Heat System Choice
Authors: Dubin Jeffrey A. 
Published: October 2008

This paper estimates a nested logit model for space heat and water heat choice using data from the 1980 Pacific Northwest Energy Survey (PNW). The estimated structure involves six alternative space heat systems and three alternative water heat fuel types. Operating and capital costs are predicted for each residence using an energy thermal model. To relax the Independence of Irrelevant Alternatives assumption we employ a family of nested logit models. We illustrate the two-step estimation method and use a Lagrange multiplier test for nested logit structure. Finally, we use the estimated models to forecast the market shares of alternative space heat systems under an assumed scenario for the course of relative fuel prices.
Positioning and Pricing a Product Line
Authors: Dobson Gregory , Kalish Shlomo 
Published: October 2008

A central problem in marketing is: how should the firm position (reposition) and price a line of related (substitute) products in order to maximize profits (or welfare). We formulate this problem faced by a monopolist as a mathematical program, outline how to obtain the market data from a sample of customers, discuss what cost data are relevant, and suggest a heuristic algorithm to solve the problem. The output of the process is a list of products to offer, their prices, and the customer segments which purchase each product. While additional real world complexities, e.g., uncertainty about customer wants, product performance, and competitive response, are not modeled, we believe the system developed can serve as an important input into the decision process when new products are designed and priced. The methodology can be used as a part of a decision support system, where management specifies the number of products desired. The system suggests a few good solutions, together with the prices and customer segments served by each product. We use the standard assumption that the market is composed of different customer segments of various sizes, each containing homogeneous customers. Customers choose one brand only, the one that provides them with maximum value for the money. The firm faces both fixed and variable production and marketing costs for each product. Competition is either nonexistent, or assumed not to respond to the firm's moves. The information available to the firm is the sizes and preferences of the segments, based on a sample of customers, and the cost data. As an alternative to the traditional approach of estimating a parametric utility function, and aggregating customers into segments, we can also use the raw data as input, where each customer in the sample represents a segment. This, we believe, allows us to reduce the errors introduced in the process. Heuristics for solving the problem are suggested. The heuristics are evaluated on a set of simulated problems, and compared to the optimal solutions. The heuristics perform well when compared to all feasible solutions on a set of small simulated problems. We also discuss the application of the procedure to a ‘real life’ sized problem.
Advertising Experiments at the Campbell Soup Company
Authors: Eastlack Joseph O. , Rao Ambar G. 
Published: October 2008

In the mid 1970's, 19 controlled experiments in the marketplace were conducted by the Campbell Soup Company to evaluate the sales impact of advertising changes for various well established packaged food brands. Changes evaluated included: budget levels, seasonality, media type and mix, creative strategy and audience targeted. Markets defined by Selling Areas Marketing Inc. (SAMI) were used as the experimental units. One of the main findings that emerged when the experiments were viewed as a whole was that budget levels, given existing creative executions, generally had little or no impact on the sales of these well established brands. However, changes in copy strategy, media selection, media mix and targeting often produced a substantial payout. These findings had a significant influence on advertising strategy at Campbell Soup Company and led to: (a) Greater emphasis on strategic development and evaluation of copy. (b) Evaluation of a larger number of (sometimes unconventional) media. (c) Implementation of much greater differences in advertising weight in budget level tests.
The Relationship Between Distribution and Market Share
Authors: Farris Paul , Olver James , De Kluyver Cornelis 
Published: October 2008

This paper develops an aggregate-level model of distribution and market share for frequently purchased, branded consumer goods that is founded in the concepts of “push” and “pull.” The model makes a key distinction between uncompromised and compromised demand as sources of market share. Uncompromised demand is demand that is satisfied when the preferred brand is found; compromised demand results from brands that lack broad distribution and whose potential customers are willing to compromise and purchase another brand when the preferred brand is not present. Trade behavior is also addressed by analyzing the effects of consumer demand “feedback” on the trade's decision to stock and merchandise the brand. Compromised demand and feedback effects may be critical, and often overlooked, determinants of market share. Under a variety of model assumptions, analytical results are consistent with longitudinal and cross-sectional evidence that market share is a convex function of distribution, increasing at an increasing rate up to 100 percent distribution. In addition to these insights, we believe that the model has promise for future normative work on balancing push and pull marketing effects.
Elimination-By-Cutoffs
Authors: Manrai Ajay K. , Sinha Prabhakant 
Published: October 2008

This paper presents Elimination-By-Cutoffs (EBC), an individual-level model of choice which derives choice probabilities from the location of choice alternatives in a perceptual space. EBC is a multidimensional operationalization of Tversky's (Tversky, A. 1972. Elimination by aspects: A theory of choice. Psych. Rev. 79(4) 281–299.) feature-based set-theoretic Elimination-By-Aspects (EBA) model of choice. It employs monotonic and noninteractive utilities of perceptual attributes in a sequential elimination strategy to determine choice. EBC like EBA is free from the property of independence from irrelevant alternatives. Unlike the independent multinomial logit model (IML), EBC takes into consideration the effect of product similarities on the computation of choice probabilities. An empirical application is also presented in this paper. The EBC model is parameterized from readily available data and is computationally tractable. A comparison between predictions from EBC and IML is drawn using a holdout sample. Approaches for assessing the implications of alternative product positioning strategies are also developed. Finally, extensions to nonmonotonic utility functions, interactive utility functions and other directions for further work with the EBC model are discussed.
Reservations: Customer Insurance in the Marketing of Capacity
Authors: Png I. P. L. 
Published: October 2008

This paper develops a simple model of pricing and choice of capacity in a market where risk-averse customers are ex-ante uncertain about their valuation for use of the capacity. As unused capacity has no salvage value, the seller maximizes profit by economizing on capacity through over-booking. Thus each customer faces both uncertainty in his own valuation as well as uncertainty about availability of capacity. Because he is risk-averse, the customer seeks insurance. Provision of insurance is complicated because each customer's realized valuation is private information. Since the seller does not know each customer's type, she must elicit the information. The most profitable pricing strategy takes the form of a reservation that induces each customer to act according to his private information: those with high valuation for use of the capacity exercise while those with lower valuation do not exercise. In this way, the reservation provides partial insurance against the customer's uncertainty in valuation (privately observed contingency) and full insurance against unavailability of capacity (observable by both seller and customer).
Price-Induced Patterns of Competition
Authors: Blattberg Robert C. , Wisniewski Kenneth J. 
Published: October 2008

This research focuses on how price changes influence the observed pattern of brand competition. The paper begins with a basic utility model formulation and examines the implications of three major classes of preference distributions on the expected patterns of competition. A price-tier model is proposed to operationalize the theory and to allow predictive testing. The price-tier model is estimated on 28 brands across four product categories. The results show a specific asymmetric pattern of price competition. Higher-price, higher quality brands steal share from other brands in the same price-quality tier, as well as from brands in the tier below. However, lower-price, lower-quality brands take sales from their own tier and the tier below brands, but do not steal significant share from the tiers above. The results are consistent with a bimodal preference distribution, with the regular price indifference point being located toward the lower-quality end of the preference distribution for the categories analyzed.
Salesforce Compensation: Theory and Managerial Implications
Authors: Coughlan Anne T. , Sen Subrata K. 
Published: October 2008

This paper discusses recent advances in the study of salesforce motivation and compensation. Special emphasis is given to quantitative approaches from the economics, finance, and marketing literatures. The paper summarizes the findings in this analytical work in the context of some examples of compensation practice in order to illustrate the usefulness of the paradigm for the evaluation and setting of compensation systems. We consider some major issues in setting compensation, such as the firm's own objective; the salesperson's objective; and the nature of the sales response function. Variations in these factors imply significant variation in optimal compensation policy, where “optimal” takes into account the components in the plan, the parameter levels of the components, and whether or not a menu of such plans should be made available to the salesforce. By highlighting the results in the literature in light of some relevant compensation examples, we show the applicability of theory to the practical concerns of salesforce management. We close with a summary of these insights and directions for future research in the area.
A New Approach to Lagrange Multipliers
Authors: Clarke Frank H. 
Published: October 2008

We consider a mathematical programming problem on a Banach space, and we derive necessary conditions for optimality in Lagrange multiplier form. We prove further that “most mathematical programming problems are normal.” The novelty of our approach lies on the one hand in the absence of both differentiability and convexity hypotheses on the functions delimiting the problem, and on the other hand in the method of proof, which is new. The approach unifies the well-known smooth and convex cases besides treating a new general class of problems. The main analytical tool in this paper is an extension to infinite-dimensional spaces of the “generalized gradient” previously introduced by the author. The calculus of the generalized gradient is explored as a preliminary step.
A Best Possible Heuristic for the k-Center Problem
Authors: Hochbaum Dorit S. , Shmoys David B. 
Published: October 2008

In this paper we present a 2-approximation algorithm for the k-center problem with triangle inequality. This result is “best possible” since for any δ < 2 the existence of δ-approximation algorithm would imply that P = NP. It should be noted that no δ-approximation algorithm, for any constant δ, has been reported to date. Linear programming duality theory provides interesting insight to the problem and enables us to derive, in O(|E| log |E|) time, a solution with value no more than twice the k-center optimal value. A by-product of the analysis is an O(|E|) algorithm that identifies a dominating set in G2, the square of a graph G, the size of which is no larger than the size of the minimum dominating set in the graph G. The key combinatorial object used is called a strong stable set, and we prove the NP-completeness of the corresponding decision problem.