Knowledge that Transforms

We develop a demand model for technology products that captures the effect of changes in the portfolio of models offered by a brand as well as the influence of the dynamics in its intrinsic preference on that brand’s performance. To account for the potential correlation in the preferences of models offered by a particular brand, we use a nested logit model with the brand (e.g., Sony) at the upper level and its various models (e.g., Mavica, FD, DSC, etc.) at the lower level of the nest. Relative model preferences are captured via their attributes and prices. We allow for heterogeneity across consumers in their preferences for these attributes and in their price sensitivities in addition to heterogeneity in consumers’ intrinsic brand preferences. Together with the nested logit assumption, this allows for a flexible substitution pattern across models at the aggregate level. The attractiveness of a brand’s product line changes over time with entry and exit of new models and with changes in attribute and price levels. To allow for time-varying intrinsic brand preferences, we use a state-space model based on the Kalman filter, which captures the influence of marketing actions such as brand-level advertising on the dynamics of intrinsic brand preferences. Hence, the proposed model accounts for the effects of brand preferences, model attributes and marketing mix variables on consumer choice. First, we carry out a simulation study to ensure that our estimation procedure is able to recover the true parameters generating the data. Then, we estimate our model parameters on data for the U.S. digital camera market. Overall, we find that the effect of dynamics in the intrinsic brand preference is greater than the corresponding effect of the dynamics in the brand’s product line attractiveness. Assuming plausible profit margins, we evaluate the effect of increasing the advertising expenditures for the largest and the smallest brands in this category and find that these brands can increase their profitability by increasing their advertising expenditures. We also analyze the impact of modifying a camera model’s attributes on its profits. Such an analysis could potentially be used to evaluate if product development efforts would be profitable.

We extend the Schmittlein et al. model (1987) of customer lifetime value to include satisfaction. Customer purchases are modeled as Poisson events, and their rates of occurrence depend on the satisfaction of the most recent purchase encounter. Customers purchase at a higher rate when they are satisfied than when they are dissatisfied. A closed-form formula is derived for predicting total expected dollar spending from a customer base over a time period (0, T]. This formula reveals that approximating the mixture arrival processes by a single aggregate Poisson process can systematically underestimate the total number of purchases and revenue. Interestingly, the total revenue is increasing and convex in satisfaction. If the cost is sufficiently convex, our model reveals that the aggregate model leads to an overinvestment in customer satisfaction. The model is further extended to include three other benefits of customer satisfaction: (1) satisfied customers are likely to spend more per trip on average than dissatisfied customers, (2) satisfied customers are less likely to leave the customer base than dissatisfied customers, and (3) previously satisfied customers can be more (or less) likely to be satisfied in the current visit than previously dissatisfied customers. We show that all the main results carry through to these general settings.

Chat rooms, recommendation sites, and customer review sections allow consumers to overcome geographic boundaries and to communicate based on mutual interests. However, marketers also have incentives to supply promotional chat or reviews in order to influence the consumers’ evaluation of their products. Moreover, firms can disguise their promotion as consumer recommendations due to the anonymity afforded by online communities. We explore this new setting where advertising and word of mouth become perfect substitutes because they appear indistinguishable to the consumer. Specifically, we investigate here whether word of mouth remains credible and whether firms choose to devote more resources promoting their inferior or superior products. We develop a game theoretic model in which two products are differentiated in their value to the consumer. Unlike the firms, the consumers are uncertain about the products’ quality. The consumers read messages online that help them decide on the identity of the superior product. We find a unique equilibrium where online word of mouth is persuasive despite the promotional chat activity by competing firms. In this equilibrium, firms spend more resources promoting inferior products, in striking contrast to existing advertising literature. In addition, we discuss consumer welfare implications and how other marketing strategies might interact with promotional chat.

Asymmetric pricing or asymmetric price adjustment is the phenomenon where prices rise more readily than they fall. We offer and provide empirical support for a new theory of asymmetric pricing in wholesale prices. Wholesale prices may adjust asymmetrically in the small but symmetrically in the large, when retailers face cost of price adjustment. Such retailers will not adjust prices for small changes in their costs. Manufacturers then see a region of inelastic demand where small wholesale price changes do not translate into commensurate retail price changes. The implication is asymmetric—a small wholesale price increase is more profitable because manufacturers will not lose customers from higher retail prices; yet, a small decrease is less profitable, because it will not lower retail prices; hence, there is no extra revenue from greater sales. For larger changes, this asymmetry in the behavior of wholesale price vanishes as the price adjustment cost is compensated by the increase in retailers’ revenue resulting from correspondingly large retail price changes. We present a formal economic model of a channel with forward-looking retailers and cost of price adjustment, test the derived propositions on the behavior of manufacturer prices using a large supermarket scanner data set, and find that the results are consistent with the predictions of our theory. We then discuss the implications for asymmetric pricing, channels, and cost of price adjustment literatures, as well as public policy.

We propose that the variety a brand offers often serves as a quality cue and thus influences which brand consumers choose. Specifically, brands that offer a greater variety of options that appear compatible and require similar skills tend to be perceived as having greater category expertise or core competency in the category, which, in turn, enhances their perceived quality and purchase likelihood. Six studies support this proposition and demonstrate that compared to brands which offer fewer products, a brands which offer increased compatible variety are perceived as having higher quality; b this effect is mediated by product variety's impact on perceived expertise; c the higher perceived quality produces a greater choice share of the higher variety brand, even among consumers who select options that multiple brands offer and d product variety also impacts post-experience perceptions of taste. The findings suggest that in addition to directly affecting brand choice share through influencing the fit with consumer preferences, product line length can also indirectly affect brand choice through influencing perceived brand quality.

A brand choice model with heterogeneous price-threshold parameters is used to investigate a three-regime piecewise-linear stochastic utility function. The model is used to explore the relationships between aspects of consumer price sensitivity and price thresholds using hierarchical Bayes modeling with the Markov chain Monte Carlo (MCMC) method. This study contributes to the modeling literature on discontinuous likelihoods in choice models. The empirical application using our scanner panel data set shows that the reference effect and loss aversion are more marked after price thresholds are taken into heterogeneous price response models. Furthermore, loss aversion is attenuated by using price thresholds than by an aggregate (homogeneity) model without price thresholds.

The motion picture industry has provided a fruitful research domain for scholars in marketing and other disciplines. The industry has high economic importance and is appealing to researchers because it offers both rich data that cover the entire product lifecycle for many new products and because it provides many unsolved “puzzles.” Although the amount of scholarly research in this area is rapidly growing, its impact on practice has not been as significant as in other industries (e.g., consumer packaged goods). In this article, we discuss critical practical issues for the motion picture industry, review existing knowledge on those issues, and outline promising research directions. Our review is organized around the three key stages in the value chain for theatrical motion pictures: production, distribution, and exhibition. Focusing on what we believe are critical managerial issues, we propose various conjectures—framed either as research challenges or specific research hypotheses—related to each stage in the value chain and often involved in understanding consumer movie-going behavior.

To increase the sales of their products through advertising, firms must integrate their brand-advertising strategy for capturing market share from competitors and their generic-advertising strategy for increasing primary demand for the category. This paper examines whether, when, and how much brand advertising versus generic advertising should be done. Using differential game theory, optimal advertising decisions are obtained for a dynamic duopoly with symmetric or asymmetric competitors. We show how advertising depends on the cost and effectiveness of each type of advertising for each firm, the allocation of market expansion benefits, and the profit margins determined endogenously from price competition. We find that generic advertising is proportionally more important in the short term and that there are free-riding effects leading to suboptimal industry expenditure on generic advertising that worsen as firms become more symmetric. Due to free-riding by the weaker firm, its instantaneous profit and market share can actually be higher. The effectiveness of generic advertising and the allocation of its benefits, however, have little effect on the long-run market shares, which are determined by brand-advertising effectiveness. Extensions of the model show that market potential saturation leads to a decline in generic advertising over time.