Demands
Uniform Pricing in US Retail Chains
Stefano DellaVigna & Matthew Gentzkow
Quarterly Journal of Economics, forthcoming
Abstract:
We show that most US food, drugstore, and mass merchandise chains charge nearly uniform prices across stores, despite wide variation in consumer demographics and competition. Demand estimates reveal substantial within-chain variation in price elasticities and suggest that the median chain sacrifices $16m of annual profit relative to a benchmark of optimal prices. In contrast, differences in average prices between chains are broadly consistent with the optimal benchmark. We discuss a range of explanations for nearly uniform pricing, highlighting managerial inertia and brand-image concerns as mechanisms frequently mentioned by industry participants. Relative to our optimal benchmark, uniform pricing may significantly increase the prices paid by poorer households relative to the rich, dampen the response of prices to local economic shocks, alter the analysis of mergers in antitrust, and shift the incidence of intranational trade costs.
Algorithm Overdependence: How the Use of Algorithmic Recommendation Systems Can Increase Risks to Consumer Well-Being
Sachin Banker & Salil Khetani
Journal of Public Policy & Marketing, forthcoming
Abstract:
Consumers increasingly encounter recommender systems when making consumption decisions of all kinds. While numerous efforts have aimed to improve the quality of algorithm-generated recommendations, evidence has indicated that people often remain averse to superior algorithmic sources of information in favor of their own personal intuitions (a type II problem). The current work highlights an additional (type I) problem associated with the use of recommender systems: algorithm overdependence. Five experiments illustrate that, stemming from a belief that algorithms hold greater domain expertise, consumers surrender to algorithm-generated recommendations even when the recommendations are inferior. Counter to prior findings, this research indicates that consumers frequently depend too much on algorithm-generated recommendations, posing potential harms to their own well-being and leading them to play a role in propagating systemic biases that can influence other users. Given the rapidly expanding application of recommender systems across consumer domains, the authors believe that an appreciation and understanding of these risks is crucial to the effective guidance and development of recommendation systems that support consumer interests.
Higher Market Thickness Reduces Matching Rate in Online Platforms: Evidence from a Quasiexperiment
Jun Li & Serguei Netessine
Management Science, forthcoming
Abstract:
Market thickness is a key parameter that can make or break a platform's business model. Thicker markets can offer more opportunities for participants to meet and higher chances that a potential match exists. However, they can also be vulnerable to potential search frictions. In this paper, using data from an online peer-to-peer holiday property rental platform, we aim to identify and measure the causal impact of market thickness on matching rates. In particular, we exploit an exogenous shock to market size caused by a one-time migration of listings from other platforms, which gives rise to a quasiexperimental design. We find that increased market thickness actually leads to lower matching rates. Keeping search technology and other factors constant, doubling market size leads to a 15.4% reduction in traveler confirmation rate and a 15.9% reduction in host occupancy rate. As a result, the platform lost 5.6% of potential matches because of the increased market size. We attribute the effect to increased search friction: travelers' search intensity increases by 18.3% when market size doubles. This effect is especially prominent when the matching needs to take place within a limited time. Our results offer insights for future empirical and theoretical research on matching markets. They also highlight that is important for platform owners to watch out for increased search frictions as markets grow and invest in search technologies to facilitate more efficient search.
The Competitive Effects of Entry: Evidence from Supercenter Expansion
Peter Arcidiacono et al.
American Economic Journal: Applied Economics, forthcoming
Abstract:
Coupling weekly grocery transactions with the exact location and opening date of Walmarts over an eleven year period, we examine how Supercenter entry affects prices and revenues at incumbent supermarkets. We find that entry within one mile of an incumbent causes a sharp 16 percent drop in revenue, a competitive effect that decays quickly with distance. Surprisingly, despite large cross-sectional differences in supermarket prices by exposure to Walmart, our findings also indicate that Supercenter entry has no causal effect on incumbent prices. This result is robust across many dimensions including a lack of price response for individual products and across brands within a category.
The Cost of Status: When Social and Economic Interests Collide
Curt Moore et al.
Organization Science, forthcoming
Abstract:
Although researchers have devoted considerable attention to assessing how organizations benefit from ascriptions of high status, relatively little research has analyzed the financial costs that organizations may incur in actively managing such ascriptions. In this study, we analyze how and why organizations may pay a relatively steep economic price for the attainment and/or maintenance of social status. Specifically, we advance an original theoretical perspective, which suggests that firms engaged in economic competition are simultaneously engaged in social ceremony and that these dual processes can generate a combination of social gains (in terms of status) and economic losses (in terms of profitability). We theorize and test our perspective in the context of competitive bidding ceremonies using a unique, decade-long data set on repeated competitive market interactions among firms in the U.S. construction industry. We find support for our prediction that firms' participation in bidding ceremonies can generate divergent outcomes, that is, higher social status and diminished economic performance. We discuss the implications of our theoretical and empirical analysis for the existing literature on social status, competitive bidding, and - more generally - on the role social forces play in competitive market behaviors and outcomes.
When "More" Seems Like Less: Differential Price Framing Increases the Choice Share of Higher-Priced Options
Thomas Allard, David Hardisty & Dale Griffin
Journal of Marketing Research, forthcoming
Abstract:
Four experiments supported by six supplemental studies show that premium but higher-priced products (e.g., direct flights, larger-capacity data storage devices) are more popular when the additional cost is made explicit using differential price framing (DPF; e.g., "for $20 more") rather than being left implicit, as in standard inclusive price framing (IPF; e.g., "for $60 total"). The DPF effect is driven by pricing focalism: relative to IPF, DPF creates a focus on the price difference, which, because it is smaller than the total price, leads to lower perceived expensiveness and thus greater choice share for the premium option. This price framing effect is robust to displaying the total cost of the purchase, bad deals, and easy-to-compute price differences, and it appears to be uniquely effective in pricing contexts. However, DPF effects are reduced among consumers who adopt a slow and effortful decision process. These findings have implications for research on price partitioning, the design of effective pricing strategy, the sources of expensiveness perceptions in the marketplace, and consumer welfare.
Gift Purchases as Catalysts for Strengthening Customer-Brand Relationships
Andreas Eggert, Lena Steinhoff & Carina Witte
Journal of Marketing, forthcoming
Abstract:
Gift giving is an effective means to strengthen interpersonal relationships; it also may initiate and enhance customer-brand relationships. Through a field study conducted with an international monobrand retailer of beauty products, a combination of propensity score matching with difference-in-differences estimations, and two experimental scenario studies, this research demonstrates that gift buyers spend 63% more in the year following a gift purchase than a matched sample of customers who purchase for their personal use. Specifically, gift buyers increase their purchase frequency (25%), spend more per shopping trip (41%), and engage in more cross-buying (49%). The sales lift is particularly pronounced among new customers. Identity theory suggests customer gratitude and public commitment as mediating mechanisms. Gift purchase design characteristics (i.e., assistance during gift purchase and branded gift wrapping) influence the strength of the mediating mechanisms.
Let the Logo Do the Talking: The Influence of Logo Descriptiveness on Brand Equity
Jonathan Luffarelli, Mudra Mukesh & Ammara Mahmood
Journal of Marketing Research, forthcoming
Abstract:
Logos frequently include textual and/or visual design elements that are descriptive of the type of product/service that brands market. However, knowledge about how and when logo descriptiveness can influence brand equity is limited. Using a multimethod research approach across six studies, the authors demonstrate that more (vs. less) descriptive logos can positively influence brand evaluations, purchase intentions, and brand performance. They also demonstrate that these effects occur because more (vs. less) descriptive logos are easier to process and thus elicit stronger impressions of authenticity, which consumers value. Furthermore, two important moderators are identified: the positive effects of logo descriptiveness are considerably attenuated for brands that are familiar (vs. unfamiliar) to consumers and reversed (i.e., negative) for brands that market a type of product/service linked with negatively (vs. positively) valenced associations in consumers' minds. Finally, an analysis of 597 brand logos suggests that marketing practitioners might not fully take advantage of the potential benefits of logo descriptiveness. The theoretical contributions and managerial implications of these findings are discussed.
The Impact of Resource Scarcity on Price-Quality Judgments
Hanyong Park, Ashok Lalwani & David Silvera
Journal of Consumer Research, forthcoming
Abstract:
Consumers routinely encounter situations in which they perceive that resources are scarce. However, little is known about how this perception influences consumers' use of price in their purchase decisions. The present research seeks to fill this gap by examining the link between scarcity and the tendency to use price to judge product quality, and the mechanisms underlying that link. Six studies (and five more reported in the web appendix) using multiple product categories and a variety of operationalizations of both scarcity and price-quality judgments show that scarcity decreases consumers' tendency to use price to judge product quality. This occurs because scarcity induces a desire to compensate for the shortage and seek abundance, and thereby reduces an individual's general categorization tendency (because categorizing brings about a feeling of reduction); this, in turn, hinders consumers from viewing products as belonging to different price-tier groups, and thus lowers their tendency to use price as a basis for judging product quality. Boundary conditions for the proposed effect are also identified. The current research makes fundamental contributions to the literatures on scarcity, price-quality judgments, and categorization.
Lead Offer Spillovers
Matthew McGranaghan et al.
Marketing Science, forthcoming
Abstract:
Price promotions are typically offered in groups on websites, mailings, and circulars, but little is known about how promotional offers in near proximity affect each other. Across two large-scale field experiments (N = 66,184) conducted on a multibrand coupon website, we find that when lead promotions offer high-value deals, consumers are more likely to print subsequent offers, a finding we call "lead offer spillover." In the first field experiment, doubling the value of three lead offers increased the printing of subsequent offers by 18% and redemptions by 12%. In the second, doubling the value of a single lead offer increased subsequent offer prints by 12%. Additional analyses and experiments indicate that larger lead offers increase consumer search for subsequent offers and are not primarily driven by changes in evaluative judgments or complementarities between lead and subsequent offers.
Is It Beneficial to Recommend Differently Priced Products? Experimental Evidence from an Online Product Recommendation System
Anuj Kumar & Xiang (Shawn) Wan
University of Florida Working Paper, June 2019
Abstract:
Online recommendation systems recommend products with widely different prices than that of their focal products. While conventional wisdom suggests that consumers may prefer lower priced recommendations, prior literature also indicates that consumers may not accept such products if their prices fall outside the range of their reference prices. We empirically examine this question - how does recommending differently priced product affect their demand - with a field experiment on a US based fashion retailer's website. We find that recommending differently priced products decreases their purchase probability by 12.5 percent. We estimate several exacting specifications to show that our results are due to the differences in prices and not characteristics between the focal and recommended products. Based on our estimate, we simulate the demand for recommended products by replacing the lowest order differently priced recommendations for focal products with the similarly priced products. Such replacement results in 23 percent increase in the purchase probability of recommended products, which translates into a 2 percent increase in the total sales of recommended products. Overall, our study highlights that the relative price of recommended products could significantly influence their demand and therefore, it should be considered as an additional factor in design of recommendation algorithm.