Knowledge that Transforms

The recent financial crisis led to the expansion of deposit-insurance coverage in many countries. We develop a structural model of the banking market in which banks act as financial intermediaries between consumers who have funds and businesses that seek loans, and explore the implications of such policies for banks and depositors. Our results indicate the policy could erode market discipline and increase banks’ moral hazard. As a result, banks extend their lending to riskier loans than they would have in the absence of the policy. We find this policy may even harm consumers. Moreover, market competition magnifies the lack of market discipline and induces additional moral hazard for excessive risk taking. Counterfactuals indicate banks may reduce their deposit interest rates by 2.7% in a duopoly market and almost triple their risk caps under the new policy. The estimated losses of depositors’ welfare are equivalent to at least a 3.27% drop in deposit interest rates. Data are available at https://doi.org/10.1287/mksc.2016.1009 .

We study the strategic impacts of behavioral price discrimination (BPD) on manufacturers and retailers in a distribution channel when there are switching costs in consumer demand. Unlike previous empirical studies of behavioral price discrimination, which rely only on differences in price elasticity across customers, our pricing model allows the firm strategies to additionally account for differences in price elasticity across time (due to switching costs). We estimate a dynamic pricing model using empirical data from the cola category and, through a series of counterfactuals, we find that the retailer should simply outsource the data analytics and customization of coupons to manufacturers and improve its profit beyond what it can achieve by proactively couponing on its own. We further find that serving as an information broker to sell its customer database to manufacturers can be a vital source of profit to the retailer. By contrast, manufacturers end up worse off, illustrating that customer information is a potent source of channel power to the retailer. Finally, we show that simply using customers’ most recent purchase information can significantly impact firms’ profits. BPD based on this information is easy to implement and of low cost to manufacturers and retailers. Data are available at https://doi.org/10.1287/mksc.2016.1024 .

Outlet stores offer attractive prices at locations far from central shopping districts. They form a large and growing component of many firms’ retailing strategies, particularly in the fashion industry. I use a structural demand model to show that consumers are segmented according to their sensitivity to travel distance and taste for product newness. I then develop a supply model to predict product development responses to changes in store locations. Through policy simulations, I discover that the firm uses outlet stores to serve lower-value consumers who self-select by traveling to outlet stores from central shopping districts. The firm sells older, less desirable merchandise through outlet stores to prevent cannibalization of regular store revenues by means of exploiting the positive correlation between consumers’ travel sensitivity and taste for new products. I find that the rate of new product introduction in regular stores would fall by 16% if outlet stores were closed down, while variable profits would decline by 23%. These results imply that the existence of outlet stores may enable firms to improve quality in their regular channels, thus counteracting brand dilution effects. Data are available at https://doi.org/10.1287/mksc.2017.1031 .

Firms seeking business opportunities often face corruptible agents in many markets. This paper investigates the marketing strategy implications for firms competing for business, and for the buyer in a corruptible market. We consider a setting in which a buyer (a firm or government) seeks to purchase a good through a corruptible agent. Supplier firms that may or may not be a good fit compete to be selected by the agent. Only the agent observes whether a firm is a good fit. Corruption arises due to the agent’s incentive to select a nondeserving firm in exchange for bribes. Intuitively and as expected, a sufficiently large monitoring of the agent eradicates corruption. Interestingly, however, increasing the monitoring from an initial low level can backfire, making the agent more likely to select a nondeserving firm. This nonmonotonic agent behavior makes it difficult for the buyer to reduce corruption. The implication is that the buyer should choose either to be ignorant or to take drastic measures to limit corruption. Furthermore, we show that unilateral anticorruption controls, such as the Foreign Corrupt Practices Act of 1977, on a U.S. firm seeking business in a corrupt foreign market can actually increase the firm’s profits.

Conventional advice to firms in competitive markets is to raise barriers against competitive poaching of their customers. However, we see instances where a firm enables competitor advertising to its customers. For example, Walmart hosts banner ads for TVs from Sears to customers searching for TVs on Walmart.com, risking a loss of customers in exchange for a commission. This paper explores whether and under what conditions allowing competitor advertising in one’s store may be a beneficial strategy. We analyze a duopoly market where customers are heterogeneous in search costs, information, and preferences. We find that hosting a competitor ad for an undifferentiated product can mitigate price competition and boost profits of both firms if the advertising commission is high enough. Otherwise, hosting competitor advertising may decrease the profits of both firms. Thus, there is no conflict of interest between firms in advertising and in setting the ad commission level. Yet the host prefers more efficient ads while the advertiser does not. Furthermore, the equilibrium outcome is asymmetric, with only one store featuring ads of the other. If stores are sufficiently differentiated in marginal costs of the product, the cost disadvantaged store will be the host. We show that the results are robust to displaying price in the ad, to different commission structures, and to customer uncertainty about the commission rate. The online appendix is available at https://doi.org/10.1287/mksc.2016.1015 .

Microentrepreneurs in emerging markets often rely on informal lenders for their routine borrowing needs. This paper investigates informal lenders’ and microentrepreneurs’ incentives to participate in a lender–borrower relationship in a market in which repayments are neither law protected nor asset secured. We consider a borrower who seeks a short-term loan, invests in a project, and repays in full using her project earnings if the project is successful. If the project fails, the borrower uses her outside option to repay over a period of time. The analysis uncovers an interesting effect of the borrower’s outside option on the loan rate offered by the lender—the loan rate first increases and then decreases with the borrower’s outside option. An important policy implication is that an increase in the outside options of the poor microentrepreneurs might actually reduce their surplus. Finally, we find that lenders in emerging markets may be more likely to engage in informal lending compared to those in developed or poorer markets.

As Internet advertising infomediaries nowadays provide rich competition information, sponsored search advertisers are becoming more strategic when selecting keywords. This paper empirically examines the spillover effects in advertisers’ keyword market entry decisions, that is, how an advertiser’s likelihood of using a keyword is affected by competitors’ keyword entry decisions. We develop a structural model to characterize advertisers’ keyword market entry decisions. We apply the model to a panel data set of 1,252 laptop-related keywords mainly used by 28 manufacturers, retailers, and comparison websites that advertise on Google. Our analysis leads to several interesting findings. First, an advertiser’s expected position affects the nature of the competition. In particular, the spillover effect from below-ranked competitors is always positive, while the spillover effect from above-ranked competitors is either positive or negative. Second, the spillover effect from above-ranked ads is directionally affected by firms’ product-line characteristics: the effect among firms offering homogenous products (e.g., comparison sites) is negative, whereas the effect among firms with more differentiated products (e.g., manufacturers and retailers) is positive. Third, the spillover effect from above-ranked ads is directionally affected by firms’ positions in a distribution channel: the effect from upstream (downstream) on downstream (upstream) firms tends to be negative (positive). Finally, a downstream firm is more likely to learn new keywords from an upstream firm but not vice versa. Our counterfactual simulations demonstrate that the keyword-specific competition information provided by infomediaries can improve the search engine’s revenue by about 5.7%. Data are available at https://doi.org/10.1287/mksc.2017.1053 .

This paper examines the spillover effects of promotions when products from different firms are consumed in a bundle. Using data from the HIV/AIDS category, a canonical example of combination therapy, we estimate a hierarchical Bayesian logit model across treatment regimens and show that detailing for one drug can increase demand for other drugs that are often combined with the focal drug. Such spillover effects could lead to free riding by the drugs benefitting from the spillover. We investigate the managerial and policy implications of detailing spillover effects via counterfactual policy simulations based on a dynamic oligopoly game of detailing. For managers, we show how firms can internalize the spillover effects and reduce the incentive for free riding. For policy makers, the implications of our findings relate to detailing restrictions that are often proposed on branded drugs. These restrictions aim to increase social welfare by encouraging the use of generic drugs. However, in combination therapies generic drugs may actually benefit from the detailing of complementary branded products. If detailing was curtailed, this could adversely affect generic drug prescriptions as well, which runs counter to policy makers’ objectives of encouraging use of generic drugs. Data and the online appendix are available at https://doi.org/10.1287/mksc.2016.1014 .

Increased competition from the Internet has raised concerns about the quality of prescription drugs sold online. Given the pressure from the Department of Justice, Google agreed to ban pharmacies not certified by the National Association of Boards of Pharmacy (NABP) from sponsored search listings. Using comScore click-through data originated from health-related queries, we study how the ban affects consumer search and click behavior in a difference-in-differences framework using the synthetic control method. We find that non-NABP-certified pharmacies received fewer clicks after the ban, and this effect is heterogeneous. In particular, pharmacies not certified by the NABP but certified by other sources (other-certified websites), experienced an increase in organic clicks that partially offset the loss in paid clicks after the ban. By contrast, pharmacies not certified by any certification agency experience much lower rates of substitution in organic clicks. These results suggest that the ban has increased the search cost for other-certified websites, but at least some consumers overcome the search cost by switching from sponsored to organic links. The lower substitution for uncertified websites may be explained by the rising consumer concerns about the quality of drugs sold on uncertified websites after the ban. Data and the online appendix are available at https://doi.org/10.1287/mksc.2017.1058 .

Between 2006 and 2011, daily print newspapers in the United States lost 20% of their paid subscribers, partly because of the increasing availability of alternative sources of news, such as free content provided on newspaper websites and by news aggregators such as Yahoo. However, contrary to the expectation that firms respond to softening demand by lowering prices, newspapers increased subscription prices by 40%–60% during this period. In this paper, we explain and quantify the factors responsible for these price increases. We calibrate models of readership and advertising demand using data from a top-50 U.S. regional print newspaper. Conditional on these demand models, we calibrate the newspaper’s optimal pricing equations and assess whether the increases in subscription prices are mainly rationalized by (a) the decline in overall reader willingness to pay (WTP) in the presence of heterogeneity among subscribers, which rendered it optimal for the newspaper to focus on the high WTP readers, or (b) the newspaper’s reduced incentive to subsidize readers at the expense of advertisers, because of softening demand for newspaper advertising. We find that the decline in the ability of the newspaper to subsidize readers by extracting surplus from advertisers explains most of the increase in subscription prices. Of the three available subscription options (daily, weekend, and Sunday only), subscription prices increased more steeply for the daily option, a pattern consistent with the view that newspapers are driving away low valuation weekday readers while preserving Sunday readership and the corresponding ad revenues. Thus, our research augments theoretical propositions in two-sided markets by providing a formal empirical approach to unraveling the relative importance of the roles played by agents on the subsidy and demand sides in determining prices. Data and the online appendix are available at https://doi.org/10.1287/mksc.2017.1060 .