In keyword search advertising, many advertisers operate on a limited budget. Yet how limited budgets affect keyword search advertising has not been extensively studied. This paper offers an analysis of the generalized second-price auction with budget constraints. We find that the budget constraint may induce advertisers to raise their bids to the highest possible amount for two different reasons, i.e., to accelerate the elimination of the budget-constrained competitor, and to reduce their own advertising cost. Thus, in contrast to the current literature, our analysis shows that both budget-constrained and unconstrained advertisers could bid more than their own valuation. We further extend the model to consider dynamic bidding and budget-setting decisions.
Of the many proposals to reverse the obesity epidemic, the most contentious is the use of price-based interventions such as the fat tax. Previous investigations of the efficacy of such initiatives in altering consumption behavior yielded contradictory findings. In this article, we use six years of point-of-sale scanner data for milk from a sample of over 1,700 supermarkets across the United States to investigate the potential of small price incentives for inducing substitution of healthier alternatives. We exploit a pricing pattern particular to milk in the United States, whereby prices in some geographical regions are flat across whole, 2%, 1%, and skim milk; whereas in other regions they are decreasing with the fat content level. The prevailing price structure is determined at a chain and regional level, and is independent of local demand conditions. This exogenous variation in price structure provides a quasi-experimental set-up to analyze the impact of small price differences on substitution across fat content. We use detailed demographics to evaluate price sensitivity and substitution patterns for different socioeconomic groups. Results show that small price differences are highly effective in inducing substitution to lower calorie options. The impact is highest for low-income households who are also most at risk for obesity. Our results suggest that a selective taxation mechanism that lowers the relative prices of healthier options, such that those price changes are reflected in shelf prices at the point-of-purchase, can serve as an effective health policy tool in the efforts to control obesity. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mksc.2015.0917 . Press Release
In sponsored search advertising, advertisers bid to be displayed in response to a keyword search. The operational activities associated with participating in an auction, i.e., submitting the bid and the ad copy, customizing bids and ad copies based on various factors (such as the geographical region from which the query originated, the time of day and the season, the characteristics of the searcher), and continuously measuring outcomes, involve considerable effort. We call the costs that arise from such activities keyword management costs. To reduce these costs and increase advertisers’ participation in keyword auctions, search engines offer an opt-in tool called broad match with automatic and flexible bidding, wherein the search engine automatically places bids on behalf of the advertisers and takes over the above activities as well. The bids are based on the search engine’s estimates of the advertisers’ valuations and, therefore, may be less accurate than the bids the advertisers would have turned in themselves. Using a game-theoretic model, we examine the strategic role of keyword management costs, and of broad match, in sponsored search advertising. We show that because these costs inhibit participation by advertisers in keyword auctions, the search engine has to reduce the reserve price, which reduces the search engine’s profits. This motivates the search engine to offer broad match as a tool to reduce keyword management costs. If the accuracy of broad match bids is sufficiently high, advertisers adopt broad match and benefit from the cost reduction, whereas if the accuracy is very low, advertisers do not use it. Interestingly, at moderate levels of bid accuracy, advertisers individually find it attractive to reduce costs by using broad match, but competing advertisers also adopt broad match and the increased competition hurts all advertisers’ profits, thus creating a “prisoner’s dilemma.” When advertisers adopt broad match, search engine profits increase. It therefore seems natural to expect that the search engine will be motivated to improve broad match accuracy. Our analysis shows that the search engine will increase broad match accuracy up to the point where advertisers choose broad match, but that increasing the accuracy any further reduces the search engine’s profits.
Research has shown that advertising assets and R&D (research and development) assets increase shareholder value. Although one might conclude that their impacts on bankruptcy risk are merely the inverse of their impacts on shareholder value, we argue otherwise and show that the differences hinge on the fact that shareholder value is a function of expected cash flows from all future periods, whereas bankruptcy risk is a function of expected cash flow from only the next period. We show that current market turbulence moderates the impacts of advertising assets and R&D assets on expected cash flow from the next period but not on expected cash flows from more distant future periods. Therefore, market turbulence moderates the impacts of advertising assets and R&D assets on bankruptcy risk but not shareholder value. Market stability increases the impact of advertising assets on reducing bankruptcy risk, whereas market turbulence increases the impact of R&D assets on reducing bankruptcy risk. Using a data set of more than 1,000 firms covering three decades, we find support for our hypotheses. Out-of-sample validation indicates that bankruptcy prediction performance improves when including marketing variables in addition to the usual financial predictors. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mksc.2015.0913 .
In this paper we study product line scope and pricing decisions in a horizontally differentiated duopoly. Past research has shown that a firm may offer a broader product line to attract higher demand or charge a higher price (or both), and benefit at the expense of its competitor. We show that such outcomes may be reversed, especially when consumers have relatively high valuation and low heterogeneity in their preferences for the line extension. We find that an equilibrium exists such that only one firm prefers to expand scope but profits may be higher for both firms, even in the absence of market size expansion. This is because a broader scope permits that firm to effectively price discriminate by raising prices for its core customers. The competitor optimally responds by lowering prices to gain share and earn a higher profit. Thus, higher prices for the firm expanding its product line translate into higher demand for the competing firm, thus increasing profit for both. We show that our results hold when firms deploy generic, offensive or defensive strategies during product line expansion.
This paper investigates the importance of network effects in the demand for ethanol-compatible vehicles and the supply of ethanol fuel. An indirect network effect, or positive feedback loop, arises in this context due to spatially-dependent complementarities in the availability of ethanol fuel and the installed base of ethanol-compatible vehicles. Marketers and social planners are interested in whether these effects exist, and if so, how policy might accelerate adoption of the ethanol fuel standard within a targeted population. To measure these feedback effects, I develop an econometric framework that considers the simultaneous determination of ethanol-compatible vehicle demand and ethanol fuel supply in local markets. The demand-side model considers the automobile purchase decisions of consumers and fleet operators; the supply-side model considers the ethanol market entry decisions of competing fuel retailers. The framework extends extant market entry models by endogenizing the market size shifting fuel retailer profits. I estimate the model using zip code panel data from four states over a nine-year period. The model estimates provide evidence of a network effect. Under typical market conditions, entry of an additional ethanol fuel retailer leads to a 6% increase in the probability of ethanol-compatible vehicle purchase. The entry model estimates imply that the first entrant requires a local installed base of approximately 300 ethanol-compatible vehicles to be profitable. As an application, I demonstrate that subsidizing fuel retailers to offer ethanol in selective geographic markets can be an effective policy to indirectly increase ethanol-compatible vehicle sales.
Over the past 10 years there has been increased recognition of the importance of publicity as a means of generating product awareness. Despite this, previous research has seldom investigated the impact of publicity on demand. We contribute to the literature by (i) proposing a new method for the interpretation of publicity data, one that maps the information in news articles (or broadcasts) to a multidimensional attribute space; (ii) investigating how different types of publicity affect demand; and (iii) investigating how different types of publicity interact with firms’ own marketing communication efforts. We study these issues for statins. We find that publicity plays an important role both for expanding the market for statins and for determining which statins patients or physicians choose. We also find evidence that publicity can serve as either a substitute or a complement for traditional marketing channels depending on the complexity of the information type. We argue that the interaction results are driven by the relative strengths of the corroborative and rational inattention functions in publicity. These results suggest that managers should be aware of the interactions between publicity and traditional marketing channels to better determine how to allocate their marketing expenditures.
Firms invest in technology to increase productivity. Yet in emerging markets, where a culture of informality is widespread, information technology (IT) investments leading to greater transparency can impose a cost through higher taxes and the need for regulatory compliance. The tendency of firms to avoid productivity-enhancing technologies and remain small to avoid transparency has been dubbed the “Peter Pan Syndrome.” We examine whether firms make the trade-off between productivity and transparency by examining IT adoption in the Indian retail sector. We find that computer technology adoption is lower when firms are motivated to avoid transparency. Specifically, technology adoption is lower when there is greater corruption, but higher when there is better enforcement and auditing. So, firms have a higher productivity gain threshold to adopt computers in corrupt business environments that suffer from patchy and variable enforcement of the tax laws. Not accounting for this motivation to hide from the formal sector underestimates productivity gains from computer adoption. Thus, in addition to their direct effects on the economy, enforcement, auditing, and corruption can have indirect effects through their negative impact on adoption of productivity-enhancing technologies that also increase operational transparency.
Addiction creates an intertemporal link between a consumer’s past and present decisions, altering their responsiveness to price changes relative to nonaddictive products. We construct a dynamic model of rational addiction and endogenous consumption to investigate how consumers respond to policy interventions that aim to reduce purchases of cigarettes. We find that, on average, the category elasticity is about 35% higher when the model correctly accounts for addiction. However, some policies spur substitution from more expensive single packs to less expensive cartons of cigarettes, resulting in higher overall consumption for some consumers.
This paper considers the creation and consumption of content on user-generated content platforms, e.g., reviews, articles, chat, videos, etc. On these platforms, users’ expectations regarding the amount and timing of participation by others becomes germane to their own involvement levels. Accordingly, we develop a dynamic rational expectations equilibrium model of joint consumption and generation of information. We estimate the model on a novel data set from a large Internet forum site and offer recommendations regarding strategies of managing sponsored content and content quality. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mksc.2015.0937 .