Knowledge that Transforms

In this paper, we analyze profitable pricing strategies when market segments overlap. Overlapping markets are segments that are not perfectly sealed, and leakage between them can occur. Different consumers are assumed to incur possibly different transaction costs if they choose to purchase in the low-price market. A monopolist seller knows the distribution of transaction costs across consumers and must choose an optimal pricing strategy. In particular, the monopolist must decide whether to charge a single price or to price differentiate. Conditions are derived under which price differentiation will be the most profitable strategy. When price differentiation is optimal, the equilibrium amount of leakage is determined endogenously. Unlike the standard economics textbook model of price discrimination in which zero leakage is determined exogenously and is usually given as a necessary condition for price discrimination, we show that zero leakage is not necessary for differential pricing to be optimal, and that price differentiation can be optimal even when leakage between markets is substantial. We also show that by imposing restrictions on the low-price market buyers, the seller can control leakage and increase profits. Market-specific managerial applications are illustrated.

This paper develops the advertising-sales model in continuous time with a view to studying the consequences of temporal aggregation for estimation. Difficulties arising from temporal aggregation are shown to correspond to the problem of unobservables. Two previously suggested ways of treating these unobservables due to Blattberg and Jeuland and Bass and Leone are studied in detail focusing on the nature of errors due to each approximation and the aggregation of underlying continuous time stochastic processes. The latter determine the properties of the disturbance terms in the estimating equations. Analytical results are presented and these are examined in light of an empirical application.

This paper presents a recently developed unfolding methodology for analyzing preferential/dominance data that addresses the product positioning/repositioning decision problem of product (re)design and targeting by relating brand and consumer characteristics explicitly to perceptual brand locations and ideal points respectively. The methodology and associated algorithm are applied to a set of preference data for twelve models of residential communication devices. Various managerial implications of the model for product positioning and optimal product design are illustrated and discussed.

In this paper we develop an integrated stochastic model of purchase timing and brand selection which incorporates the influence of marketing mix variables, seasonality and trend, and also allows for various individual choice mechanisms. Our approach rests on the assumptions of a zero-order choice process, a Poisson timing process and purchase rates following a multivariate Gamma Distribution over the population, the scale parameters of which vary according to marketing activities and time. The resulting model is a Multivariate Polya Process, and the distribution of brand choice probabilities turns out to be a Generalized Dirichlet Distribution. Thus, most currently used zero-order models can be considered to be special cases of this approach. Furthermore, we derive a number of market diagnostics which provide insights into market structure and demonstrate the model's use for marketing strategy simulation. Based on extensive testing of the underlying hypotheses we finally validate the model using empirical data and show that it fits the market in question.

This paper compares consumer likelihood of purchase ratings for a proposed new product to their actual purchase behavior after the product was introduced. The ratings were obtained from a mail survey a few weeks before the product was introduced. The analysis leads to a model for forecasting new product sales. The model is supported by both empirical evidence and a reasonable theoretical foundation. In addition to calibrating the relationship between questionnaire ratings and actual purchases, the empirical evidence demonstrates the significant effect of alternative promotion/distribution vehicles on new product sales. The model uses questionnaire data to extend the results of a limited market trial to alternative target markets, product specifications, and prices.

In this paper, we use an agency theory framework to address the issue of delegating pricing responsibility to the salesperson. In this analysis, it is shown that delegating the pricing responsibility to the salesperson is as profitable as centralization when the salesperson and the sales manager have identical information about the selling environment; but delegation may be more profitable when the saleperson's information is superior to that of the sales manager's. It is also argued that this characteristic is typical of market conditions where we observe delegation of such responsibility in cases identified by Weinberg (Weinberg, C. B. 1975. An optimal commission plan for salesman's control over price. Management Sci. 21 (8, April) 937–943.) and Stephenson, Cron and Frazier (Stephenson, P. R., W. L. Cron, G. Frazier. 1979. Delegating pricing authority to the salesforce: The effects on sales and profit performance. J. Marketing 43 (April) 21–28.).

This paper analyzes dynamic pricing strategies for new durable goods in a two-period context. The first period is characterized as a monopoly market structure for a new product having dynamic demand. The second period begins when a new firm enters the market, and thereby changes the market structure to a duopolistic one. We begin by analyzing the pricing strategies of three types of monopolists: nonmyopic, myopic and “surprised.” A nonmyopic monopolist is a first entrant who perfectly predicts the competitive entry. A myopic monopolist totally discounts the duopolistic period, and a “surprised” monopolist is a first entrant who has the longer time horizon of the nonmyopic monopolist, but who does not foresee the competitive entry. Our results indicate that the nature of these pricing strategies may be quite different. It is optimal for the nonmyopic firm to price its product at a higher level than the myopic monopolist. Additional results indicate under what circumstances the “surprised” monopolist will price too high during the monopoly period. The intuition behind these results is the fact that the myopic monopolist overestimates competition while the surprised monopolist underestimates it. We also characterize the nature of the dynamic equilibrium prices that will prevail during the competitive period. For example, we show that products having higher prices (because of cost differences) will exhibit a more rapid rate of price decline. Moreover, a discontinuity in the first entrant's pricing strategy, as a response to a second entry—which is often observed in the market place—is also captured by our model. Because these analyses are limited to situations where the time of second entry is predictable, a scenario that fits our model better would be the health-care equipment industry where a specified period of government observation and/or testing is required. Immediate extensions of our model should include a discount factor and learning effects on both costs and demand.

In this paper, we present a theory of salesforce compensation plans to provide insights into why it may be advantageous for a profit maximizing firm to offer members of its salesforce the opportunity to choose from a menu of compensation plans. Although such contractual arrangements are not commonly used in the industry, they have been introduced and implemented by firms such as IBM and St. Regis Paper. As in our previous work on salesforce compensation plans (Basu, Lal, Srinivasan, and Staelin [Basu, A. K., R. Lal, V. Srinivasan, R. Staelin. 1985. Salesforce compensation plans: An agency theoretic perspective. Marketing Sci. 4 (Fall) 267–291.]) we use an agency-theory framework. In this paper, we relax the assumptions of information symmetry and salesforce homogeneity and show the conditions under which it is optimal to offer a menu of compensation plans. We also show that even when these assumptions are relaxed there are situations where offering a single plan characterized by Basu, Lal, Srinivasan, and Staelin (Basu, A. K., R. Lal, V. Srinivasan, R. Staelin. 1985. Salesforce compensation plans: An agency theoretic perspective. Marketing Sci. 4 (Fall) 267–291.) is still optimal. Insights gained from the analyses are discussed in the context of an existing compensation scheme.

The question of whether a pulsed advertising policy is superior to an even policy (constant spending over time) is of practical relevance to both advertising practitioners and model builders. This paper presents an analytical model that can be used to analyze the impact of the various pulsing and even policies on awareness. In addition to establishing the relationships between the various advertising policies analytically, an application of the proposed model to the actual Zielske's data is included.

This paper surveys economic choice theory, stressing developments that permit use of data from psychometric and conjoint experiments to produce market demand forecasts. Alternatives to the widely used multinomial logit model are summarized, and a new method for estimating multinomial probits is described. An integration of choice models with attitudinal scaling and perceptual mapping, within a latent variable system, is described. Estimation of such systems under either “random effects” or “fixed effects” descriptions of heterogeneity across individuals is discussed. Issues in the use of choice models to describe responses from conjoint experiments are presented. New regression diagnostic tests for the consistency of multinomial logit representations are discussed.