Knowledge that Transforms

This paper proposes a descriptive model of the spatial and temporal evolution of retail distribution for new packaged goods. The distribution model postulates separate processes for local market entry by manufacturers, and adoption by retailers given entry. Of special interest is whether retail adoption occurs along a competitive network with retailers as nodes and overlapping trade areas of these retailers as links. The model is calibrated on data covering the introduction of two very successful new brands in the frozen pizza category. For these brands, manufacturers sequentially enter markets based on spatial proximity to markets already entered (spatial evolution), and on whether chains in these markets adopted previously elsewhere (market selection). A retail chain adopts new brands based on the adoption timing of competing chains within its trade territory (competitive contagion) and on the fraction of its trade area in which the new brand is available (trade area coverage). The effects of market selection and of trade area coverage create dependencies between market entry and retail adoption. Because of these dependencies the attraction of a particular market as a lead market depends on its location in the geographic structure of the U.S. retail trade.

This paper presents an initial examination of an emerging business model, the Name-Your-Own-Price (NYOP) channel, as popularized by priceline.com. Focusing on how to optimally structure such market interactions, I ask whether it is more profitable to restrict individuals to a single bid, as is currently done by Priceline, or conversely, to allow consumers to continue bidding if the previous offer was rejected. I find that both market structures yield the same expected profit. In practice, a single-bid policy may not be perfectly enforceable, especially in the Internet environment, because a sophisticated user can circumvent such a policy by camouflaging one's identity or otherwise manipulating the bidding procedure. Thus, Priceline's single-bid restriction is likely to result in Partial-Repeat-Bidding, the case in which some consumers are limited to a single bid while other, sophisticated users may rebid. I ask whether such surreptitious bidding is detrimental to the NYOP firm and find that profits are lower than if such opportunistic behavior were absent. Surprisingly, I find that the impact of the number of repeat bidders on profits is not monotonic. Thus, if it is prohibitively costly or logistically infeasible for the NYOP firm to eliminate surreptitious rebidding behavior, the firm may, in fact, benefit from encouraging, rather than discouraging, users to rebid. The direction that increases profits depends on the percentage of sophisticated bidders.

Research on the product life cycle (PLC) has focused primarily on the role of diffusion. This study takes a broader theoretical perspective on the PLC by incorporating informational cascades and developing and testing many new hypotheses based on this theory. On average, across 30 product categories, the authors find that: (i) New consumer durables have a typical pattern of rapid growth of 45% per year over 8 years. (ii) This period of growth is followed by a slowdown when sales decline by 15% and stay below those of the previous peak for 5 years. (iii) Slowdown occurs at 34% population penetration and about 50% of ultimate market penetration. (iv) Products with large sales increases at takeoff tend to have larger sales declines at slowdown. (v) Leisure-enhancing products tend to have higher growth rates and shorter growth stages than nonleisure-enhancing products. Time-saving products tend to have lower growth rates and longer growth stages than nontime-saving products. (vi) Lower probability of slowdown is associated with steeper price reductions, lower penetration, and higher economic growth. (vii) A hazard model can provide reasonable predictions of the slowdown as early as the takeoff. The authors discuss the implications of these findings.