Knowledge that Transforms

Given that durable products are long-lived, there exists the possibility of secondary markets for used products as well as the potential for product obsolescence. This is an important issue in markets where technology changes rapidly, because the introduction of new versions of a product can make earlier versions obsolete. More generally, prices of older versions in the secondary market adjust in response to changes incorporated in new versions of the product. Thus, another method of evaluating consumers' response to a new product is by looking at the variation in market prices of the old product. This paper develops a general model to explore the relationship between primary markets for new cars and secondary markets for used cars. The results suggest that the depreciation of used cars is influenced strongly by the types of changes in new model cars.

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.

This paper describes a case application of SIMOPT, a product positioning model and decision support system.

A time series cross-sectional analysis of 18 successful later entrants in 8 categories of consumer packaged goods over the period from October 1983 to January 1988 confirms previous empirical findings that, after correcting for differences in marketing effort, later entrants suffer a long-term market share disadvantage. New evidence of the penalties associated with later entry are found in statistical estimation of models of cumulative trial, first repeat, and subsequent repeat purchasing. Significantly lower asymptotic levels are found in both trial and repeat behavior. However based on this data, the rate of approach of later entrants to their lower asymptotic performance measures is either equal to or faster than early entrants and provides evidence of a compensating partial effect accrued by later entrants.

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.

Our objective in this research is to relate variability in product category sales to promotional activity in the product category, and other category specific characteristics. The findings may be relevant from retailers' perspective as retailers' revenues are more closely related to the sales of the product category as opposed to the sales of any particular brand. We analyze data on about 2,000 brands from 25 different SAMI categories, obtained with the cooperation of a major grocery chain. Our data suggest that an increase in the magnitude of discounts increases the variability in category sales but an increase in the frequency of discounts has an opposite effect. Furthermore, categories which are bulky, or categories where the degree of competitiveness is high, exhibit lower variability in sales.

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.

Although there has been a good deal of research on incorporating the effects of reference price formation into empirical models of consumer buying behavior, little formal theoretical work had been undertaken to date. This paper incorporates reference price effects into the traditional economic theory of consumer choice, and examines the effects of reference price formation on the results of the traditional theory, its marketing implications, and the implications for empirical models which examine the effects of reference price formation on actual consumer behavior. Several implications of the theoretical model are empirically tested using weekly retail egg sales data from Southern California. This analysis indicates that reference price formation does have significant effects on consumer behavior. Furthermore, these effects are asymmetric with consumers two and a half times more responsive to egg price increases that are in excess of the reference price than they are to comparable egg price decreases.