Knowledge that Transforms

Advertising networks have recently played an increasingly important role in the online advertising market. Critical to the success of an advertising network are two mechanisms: an allocation mechanism that efficiently matches advertisers with publishers and a pricing scheme that maximally extracts surplus from the matches. In this paper, we quantify the value and investigate the determinants of a successful advertiser-publisher match, using data from Taobao’s advertising network. A counterfactual experiment reveals that the platform’s profit under a decentralized allocation mechanism is close to the profit level when the platform centrally assigns the matching under perfect platform knowledge of matching values. In another counterfactual experiment, we explore the effect of platform technology and revenue model on the strategic choice of the pricing schemes of list price versus generalized second price (GSP) auction pricing. We find that platforms that profit from the advertiser side may have less incentive to adopt GSP auction than platforms that profit from the publisher side.

Building on the structural two-sided matching model, we develop a framework to study the sourcing market in the context of marketing firms matching with manufacturers. Both sides prefer partners that could generate significant values with better sourcing process abilities. Moreover, experienced manufacturers are preferred by the branded marketing firms who may even be willing to compensate the matching intermediary more for facilitating that preference. Empirical research, measuring the values of such matching and the intermediary’s pricing (through commission) on observed marketing firms’ characteristics and the low-cost manufacturers and the deals that result, is problematic, when some of the characteristics are only partially observed and the matching is endogenous. With the matching model, we can control for endogenous matching. We find evidence of positive assortative matching of pairs’ size on both sides of the market. We also find that manufacturers’ location and tenure, and whether the marketing firms are listed, are important factors in identifying the preferred matching partners and the related ranking. Without controlling for endogenous matching, the intermediary’s pricing equation estimates are biased, especially for the marketing firms that specialize in luxury products.

In many consumption settings (e.g., restaurants), individuals consume products either alone or with their peers (e.g., friends). In this study, we propose a general framework for modeling peer effects by including two new peer effects: the exogenous peer effect (exogenous factors that could change the peer’s behavior) and the peer presence effect (when the peer is present but not consuming). We also include the well known endogenous peer effect. We develop an empirical model that allows us to identify all three effects simultaneously and apply the model to behavioral data from a casino setting. It is a simultaneous equation model with the structural parameters expressed as a function of the ratio of the reduced form parameters. This necessitates the use of the Minimum Expected Loss approach, allowing us to obtain consistent estimates at the individual level. Our data comprise detailed gambling activity for a panel of individuals at a single casino over a two-year period. Our results show that all three types of peer effects exist. These effects vary across individuals and exhibit considerable asymmetry within pairs of peers. We discuss how our results can help managers allocate resources more effectively and policy makers formulate regulatory guidelines with more complete information.

Promotions are used in marketing to increase sales and drive profits by temporarily decreasing the price per unit of a good. Some price promotions apply to all quantities (20% off), some have limits on the number of units that can be purchased at a reduced price, and others only offer the discount if the volume purchased is sufficiently high. We develop a model of price promotions in the context of a direct utility model where its effects are incorporated through the budget constraint. Price promotions complicate the estimation and analysis of direct utility models because they induce kinks and points of discontinuity in the budget set. We propose a Bayesian approach to addressing these irregularities and demonstrate the ability of the direct utility model to be used in counterfactual analyses of price promotions. We investigate the stability of utility function estimates for consumers under alternative price promotions, and find that the majority of the effect of a price promotion is through the budget set, not through changes in the utility function. We also investigate the economic value of customized price promotions where the customization includes the value and format of the offer. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mksc.2015.0948 .

Consumers in many emerging markets exhibit a pronounced preference for western and global brands, while domestic brands are often associated with a cheap but low quality image. Frustrated with the negative country-of-origin (COO) stereotype imposed on them, many domestic brands from emerging markets follow a variety of approaches to disguise their COO and pretend to be foreign. This paper studies the strategic aspects of this phenomenon. We consider an experience good market where consumers learn about each brand’s quality, using its COO as a prior. Each firm can invest in product quality or COO dissociation; the former generates better quality signals while the latter simply masks the firm’s COO identity. The analysis reveals a few main insights. Sharing a reputation leads to a common good problem where firms free-ride on each other’s quality investments. As a high quality firm dissociates itself from the stereotype, it ceases to contribute to the COO image but also prevents its low quality peers from free-riding on it. This incurs a negative direct effect but a positive strategic effect on the group image. Consequently, a country’s COO image may actually improve when more high quality brands shun their identities and pretend to be foreign. In equilibrium, COO image improves monotonically as firms become more efficient in providing quality. However, the prevalence of COO dissociation may first increase then decrease. We discuss the implications of these results for emerging market brands as well as policy makers.

When match uncertainty is resolved via costly evaluation, the first product sampled by a customer is more likely to make the sale. This prompts firms to lower their products’ evaluation costs to attract customers to sample their products first. Such efforts by firms are called customer learning investment (CLI). When product quality is freely observable but horizontal match is not, we examine how CLI choices interact with quality and price competition in a duopoly. CLI has a competition effect in that a higher CLI of a firm increases its demand but decreases that of its rivals. In the market-covered duopoly, both qualities will decrease (increase) when the high-end (low-end) firm invests more in customer learning, and remain unchanged when they invest equally, relative to when neither firm invests. We further show that the firm with a higher relative production efficiency invests more in customer learning than the competitor. In the market-not-covered duopoly, CLI by the low-end firm also creates a market-expansion effect by inducing some additional low-end customers to sample and purchase its product. This may induce it to invest more than the high-end firm, even when the latter has a higher relative production efficiency.

This paper examines position auctions with budget-constrained advertisers, a dominant bidding environment used by publishers to allocate positions in online advertising. Budget constraints play a crucial role in equilibrium bidding by inducing advertisers to strategically deplete a higher-ranked advertiser’s budget to gain in rank. This strategic consideration has consequences for the advertisers’ profits and the publisher’s revenue. An advertiser’s profit can strictly decrease with her budget when competition for an advertising space (e.g., a keyword) is intense. The publisher’s revenue can also strictly decrease when an increase in the higher-ranked advertiser’s budget induces the lower-ranked rival to reduce her bid, due to her inability to deplete the higher-ranked advertiser’s budget. Several managerial implications for advertisers and publishers are discussed.

Countermarketing, or efforts to reduce consumption of certain products, has become common in categories such as tobacco, junk food, fossil fuels, and furs. Countermarketing has a particularly long history in the tobacco industry. Efforts to reduce smoking have included excise taxes that increase the cost of consumption, smoke-free restrictions that make consumption less convenient, and antismoking advertising campaigns that highlight the dangers of tobacco use. This article presents an analysis of the relative effectiveness of these different strategies. We find that cigarette excise taxes are the most effective tool for reducing overall cigarette sales, followed by antismoking advertising. Smoke-free restrictions are not found to have a significant effect on cigarette sales. We also investigate how these various policy tools induce product substitution. This issue is of considerable importance because some countermarketing techniques may potentially shift consumers to more dangerous, higher nicotine and tar cigarettes. Specifically, we find that excise taxes levied on a per pack basis rather than based on nicotine levels often shift consumers to more dangerous products.

We study the pricing decision for a monopolist launching a new innovation. At the time of launch, we assume that the monopolist has incomplete information about the true demand curve. Despite the lack of objective information the firm must set a retail price to maximize total profits. To model this environment, we develop a novel two-period non-Bayesian framework where the monopolist sets the price in each period based only on a nonparametric set of all feasible demand curves. Optimal prices are dynamic as prices in any period allow the firm to learn about demand and improve future pricing decisions. Our main results show that the direction of dynamic introductory prices (versus static prices) depends on the type of heterogeneity in the market. We find that (1) when consumers have homogeneous preferences, introductory dynamic price is higher than the static price; (2) when consumers have heterogeneous preferences and the monopolist has no ex ante information, the introductory dynamic price is the same as the static price; and (3) when consumers have heterogeneous preferences and the monopolist has ex ante information, the introductory dynamic price is lower than the static price. Furthermore, the degree of this initial reduction increases with the amount of heterogeneity in the ex ante information.

To inform the design of sales force compensation plans when carryover effects exist, we propose a dynamic model where these effects, together with present selling efforts, drive sales. Our results show that a salesperson with low risk aversion exerts effort to decrease attrition from existing business, whereas a salesperson with high risk aversion does not. Why? Because carryover increases not only expected sales but also sales uncertainty. Consequently, the manager should incentivize the high risk-aversion salesperson with a concave compensation plan to counterbalance suboptimal customer attrition, and the low risk-aversion salesperson with a convex compensation plan that limits coasting on past efforts. We generalize our results to when the firm employs multiple salespeople, and when advertising and personal selling are budgeted together.