Knowledge that Transforms

Firms in several markets attract consumers by offering discounts in other unrelated markets. This promotion strategy, which we call “cross-market discounts,” has been successfully adopted in the last few years by many grocery retailers in partnership with gasoline retailers across North America, Europe, and Australia. In this paper, we use an analytical model to investigate the major forces driving the profitability of this novel promotion strategy. We consider a generalized scenario in which purchases in a source market lead to price discounts redeemable in a target market. Our analysis shows that this strategy can be a revenue driver by simultaneously increasing prices as well as sales in the source market, even though we assume the demand curve to be downward sloping in price. Moreover, it distributes additional consumption (motivated by the discount) in two markets, and under diminishing marginal returns from consumption, this can simultaneously increase firm profits and consumer welfare more effectively than traditional nonlinear pricing strategies. Our study provides many other interesting insights as well, and our key results are in accordance with anecdotal evidence obtained from managers and industry publications.

Building on the commentaries on our work, we make additional suggestions for future research on social contagion and new product diffusion. In particular, we note that social contagion may occur for many reasons and that investigating how various personal or group characteristics moderate the amount of influence some customers exert or the extent to which others are sensitive to potential influence can provide insights into the social mechanism(s) at work.

The pioneering Pasternack returns-policy model analyzed channel coordination with a single supplier catering to a retailer facing stochastic demand for a perishable product with a fixed price, and the model showed that giving partial returns of unsold stock to the retailer is the optimal policy for the entire supply chain. The result thus begs the question as to why manufacturers of perishable commodities widely accept full returns of unsold stock as the norm. We model the environment as one where two capacity-constrained manufacturers compete for shelf space with the same retailer, and we show that a complete-credit returns policy is in fact the only possible equilibrium of the game. Our results obviate the need for knowing the exact functional form of the demand distribution in order to compute the returns credit, as Pasternack's results would require. From a retailer's standpoint, we establish a simple procurement strategy and show that it is optimal. The same game with price-only contracting has a pure-strategy equilibrium when the supplier capacities are below a threshold value and a mixed-strategy equilibrium when the supplier capacities cross this threshold but are still so limited that no single supplier can with certainty supply all the quantity demanded.

This study explores the implications of rejecting the sealed-bid abstraction proposed by Zeithammer and Adams [Zeithammer, R., C. Adams. 2010. The sealed-bid abstraction in online auctions. Marketing Sci. 29(6) 964–987]. Using a conditional order statistic model that relies on the joint distribution of the top two proxy bids of an auction, Zeithammer and Adams show that inexperienced bidders' reactive bidding is the main cause of the rejection of the sealed-bid abstraction. Their empirical study suggests that a large percentage of bidders reactively bid, and there is weak evolutionary pressure for bidders to converge to sealed bidding. We discuss theoretical implications of this rejection and the role of bidder experience, as well as inferences about bidder learning. Tracking an inexperienced bidder's bidding behavior over time, we show that bidders learn and their bidding strategy gravitates toward rational bidding. Potential biases in bidder experience measurement and bidder learning can be assessed using a cross-sectional, time-series data set that tracks a random sample of new eBay bidders. Learning speed is faster with their complete bidding history rather than feedback ratings or winning observations only. We highlight the importance of proper measures of bidder experience and its effect on bidding strategy evolutions, both of which play important roles in clarifying bidding behavior in online auctions.

The phenomenon of paid search advertising has now become the most predominant form of online advertising in the marketing world. However, we have little understanding of the impact of search engine...

A foundational study regarding the diffusion of innovation involved the adoption of tetracycline by doctors in four Midwestern communities in the 1950s (Coleman et al. 1966), and it is not a coincidence that social scientists keep returning to this particular application of social network analysis (including to reanalyze this original study by Coleman and colleagues; see Van den Bulte and Lilien 2001). Studying the use of drugs by doctors involves the perfect mix of a discernable social network (among the doctors), a distinct innovation (a drug), an important area (patient care), difficult statistics (related to causal inference), and financial stakes (by pharmaceutical companies, insurers, and others). Iyengar, Van den Bulte, and Valente, in their careful

We show both analytically and through Monte Carlo simulations that applying standard hazard models to right-truncated data, i.e., data from which all right-censored observations are omitted, induces spurious positive duration dependence and hence can trick researchers into believing to have found evidence of social contagion when there is none. Truncation also tends to deflate the effect of time-invariant covariates. These results imply that not accounting for right truncation can lead managers to rely too much on word of mouth in generating new product adoption and to poorly identify the customers most likely to adopt early. Not accounting for right truncation can also lead to suboptimal pricing decisions and to erroneous assessments of variations in customer lifetime value. We assess the effectiveness of four possible solutions to the problem and find that only using an analytically corrected likelihood function protects one against truncation artifacts inflating coefficients of contagion and attenuating coefficients of time-invariant covariates.

The ability to demonstrate the impact of marketing action on firm financial performance is crucial for evaluating, justifying, and optimizing the expenditure of a firm's marketing resources. This presents itself as a formidable task when one considers both the variety and potential influence of marketing activity. We propose a hierarchical Bayesian model of simultaneous supply and demand that allows us to formally study the financial impact of a variety of marketing activities, including those that operate on different timescales. The supply-side model provides insight into how the firm allocates resources across its various subunits. We illustrate our approach in a services context by integrating data from three independent studies conducted by a large national bank. Our model allows customer and employee satisfaction to influence firm profitability by moderating the conditional relationship between the bank's operational inputs and its proclivity to produce revenue.

Private labels (PLs) are ubiquitous in several categories, including groceries, apparel, and appliances. However, existing empirical work has not examined the differential impact of various upstream supply arrangements for PL products or the strategic motives for PL supply. To do so requires one to model the interaction between private and national label (NL) products both upstream and downstream while accounting for strategic behavior on the part of manufacturers and retailers and retaining essential differences between NL and PL products. We build a model that satisfies these requirements and lets us answer our two research questions: First, can an NL firm profit from being an outsourced PL supplier? Second, what are the upstream and downstream impacts of different PL supply arrangements? We answer these questions by modeling private labels as homogenous products at wholesale, but as differentiated products at retail. In contrast, national label products are differentiated at both wholesale and retail levels. Using structural model estimates for fluid milk in a major metropolitan area, we conduct three counterfactual experiments. We find that both NL producers and retailers profit from adding private labels. We also find that a vertically integrated supply of PL leads to lower prices for end consumers.