Marketing Science

Esteban-Bravo, Mercedes; Vidal-Sanz, Jose M.; Yildirim, Gökhan

doi: 10.1287/mksc.2014.0848pmid: N/A

The customer relationship management allocation in marketing budgets is potentially misleading when it uses individual customer lifetime value estimations from historical data. Planned marketing interventions would change the purchasing behavior of different customers, and history-based decisions would thus be suboptimal. To cope with this inherent endogeneity, we model the optimal allocation of the marketing mix by accounting simultaneously for mass interventions and direct marketing interventions for each customer. This is a large stochastic dynamic problem that, in general, is computationally rather intractable as a result of the “curse of dimensionality.” We present an algorithm to derive the optimal marketing policies (how the firm should allocate its marketing resources) and the expected present value of those decisions, which maximize the long-term profitability of firms. This allows the firm to value customers/segments and helps the firm to target those that maximize long-term profitability given the optimal marketing resources allocation. We apply the proposed approach in the context of a kitchen appliance manufacturer. The results identify the most effective marketing policies and the endogenous customer values. It is in this context that we also dynamically identify the most profitable customer and the short- and long-term effects of marketing activities on each customer.

Jiang, Baojun; Ni, Jian; Srinivasan, Kannan

doi: 10.1287/mksc.2014.0850pmid: N/A

In many service markets such as consulting, auto repair, financial planning, and healthcare, the service provider may have more information about the customer’s problem than the customer, and different customers may impose different costs on the service provider. In principle, the service provider should ethically care about the customer’s welfare, but it is possible that a provider may maximize only its own profit. Moreover, the customer may not know ex ante whether the provider is ethical or purely self-interested. We develop a game-theoretic model to investigate pricing strategies and the market outcome in service markets where the provider has two-dimensional private information about her own type (whether ethical or self-interested) and about the customer’s condition (whether serious or minor). We show that in a less ethical market, a self-interested provider will charge different prices based on the customer’s condition, whereas an ethical provider will charge the same price for both conditions. In contrast, in a more ethical market, both the self-interested and the ethical provider will charge the same uniform price to both types of customers. Interestingly, both market efficiency and the customer’s ex ante expected surplus might be lower in a more ethical market than in a less ethical one.

Rossi, Peter E.

doi: 10.1287/mksc.2014.0860pmid: N/A

Marketing is a field that is rich in data. Our data is of high quality, often at a highly disaggregate level, and there is considerable variation in the key variables for which estimates of effects on outcomes such as sales and profits are desired. The recognition that, in some general sense, marketing variables are set by firms on the basis of information not always observable by the researcher has led to concerns regarding endogeneity and widespread pressure to implement instrumental variables methods in marketing problems. The instruments used in our empirical literature are rarely valid and the IV methods used can have poor sampling properties, including substantial finite sample bias and large sampling errors. Given the problems with IV methods, a convincing argument must be made that there is a first order endogeneity problem and that we have strong and valid instruments before these methods should be used. If strong and valid instruments are not available, then researchers need to look toward supplementing the information available to them. For example, if there are concerns about unobservable advertising or promotional variables, then the researcher is much better off measuring these variables rather than using instruments (such as lagged marketing variables) that are clearly invalid. Ultimately, only randomized variation in marketing variables (with proper implementation and large samples) can be argued to be a valid instrument without further assumptions.

Kumar, V.; Umashankar, Nita; Kim, Kihyun Hannah; Bhagwat, Yashoda

doi: 10.1287/mksc.2014.0862pmid: N/A

Past studies have overlooked the joint effects of economic and customer experience factors on service purchase behaviors. Furthermore, service firms tend to make substantial investments in enhancing customer experience, mitigating the negative effects of service failures through recovery efforts and increasing overall customer satisfaction. Yet, largely due to a paucity of data, we know little about how the state of the economy influences the way in which customers use past service experiences to make future purchase decisions. We hypothesize that the state of the economy moderates the effects of customer experience factors on customers’ service purchase behaviors. In addition, we examine how personal income influences the degree to which the aggregate economy influences service purchase decisions. We test the proposed model using panel survey and transaction data from an international airline carrier. Our findings demonstrate that, contrary to wisdom in the popular press, customer experience matters more when the economy is doing better, not worse. Furthermore, lower income consumers are more sensitive to changes in the economy than higher income consumers. We validate the hypothesized model using a controlled experiment and establish that aggregate measures of the economy can be used to predict individual perceptions and purchase intentions.

Kuksov, Dmitri; Wang, Kangkang

doi: 10.1287/mksc.2014.0847pmid: N/A

A well-established phenomenon of consumer buying behavior is that consumers evaluate prices relative to a reference point and exhibit loss aversion; i.e., their propensity to buy is more negatively affected by prices above the reference point than it is positively affected by prices below the reference point. The objective of this paper is to analytically examine how the competitive strategy and profitability of firms are affected by the presence of consumer loss aversion in the price dimension. Although we assume that consumer loss aversion increases consumer propensity to search for lower prices, we find that it does not necessarily lead to lower prices or profits when firms compete over multiple periods and when the consumer reference price in subsequent periods is affected by current prices. Specifically, consumer loss aversion could lead to higher prices and profits when consumer valuation is sufficiently high relative to search costs and the proportion of consumers with positive search costs is in an intermediate range. We also show that when forward-looking firms incorporate the negative effect of price promotions on future profits, the equilibrium range of price promotions may actually increase.

Shen, Qiaowei

doi: 10.1287/mksc.2014.0853pmid: N/A

The potential demand in a new industry evolves over time. Demand is initially low, but advertising by the industry’s early entrants can speed up demand growth. However, there is intrinsic uncertainty of the demand level in each period and uncertainty of the demand evolution path, which can be affected by the underlying economic environment. We construct a dynamic model that features the stochastically and endogenously expanding demand of a new industry, and we investigate the optimal entry and exit behavior of firms as the industry evolves. We find that firms’ incentive to enter early depends critically on the cost that early entrants have to pay in developing the market. When the cost is high and the benefit spills over to potential entrants, firms have an incentive to wait, and the probability of entry can increase with the number of incumbents under certain circumstances. Firms’ entry strategy is also influenced by the transition of economic states. Firms are more likely to enter under a state that shows the prospect of demand taking off soon. We also find that, in the early stage of an industry, higher demand uncertainty can induce faster entry.

Caillaud, Bernard; De Nijs, Romain

doi: 10.1287/mksc.2013.0840pmid: N/A

In a dynamic model with overlapping generations of consumers, we study duopolistic competition when firms can price discriminate, at each period, between their previous customers and the consumers that they have never served. Long-term contracts are not enforceable. In (Markov-perfect) equilibrium, one firm charges higher prices to its past customers than to its new customers, as past customers have revealed their strong preferences for the firm; the other firm, however, rewards its previous customers by charging lower prices to them than to its new customers. This loyalty reward strategy comes from the interplay between the firms’ usual incentive to extract surplus from consumers with revealed strong preferences and their incentives to acquire information and to recognize their young loyal customers. The result also relies on the firms’ inability a priori to tell different generations apart. It is the outcome of the unique equilibrium of a simplified two-period (or T-period) version of the game and holds with forward-looking consumers who are impatient enough.

Huang, Tingliang; Yu, Yimin

doi: 10.1287/mksc.2014.0851pmid: N/A

Probabilistic or opaque selling, whereby a seller hides the exact identity of a product until after the buyer makes a payment, has been used in practice and received considerable attention in the literature. Under what conditions, and why, is probabilistic selling attractive to firms? The extant literature has offered the following explanations: to price discriminate heterogeneous consumers, to reduce supply–demand mismatches, and to soften price competition. In this paper, we provide a new explanation: to exploit consumer bounded rationality in the sense of anecdotal reasoning. We build a simple model where the firm is a monopoly, consumers are homogeneous, and there is no demand uncertainty or capacity constraint. This model allows us to isolate the impact of consumer bounded rationality on the adoption of opaque selling. We find that although it is never optimal to use opaque selling when consumers have rational expectations, it can be optimal when consumers are boundedly rational. We show that opaque selling may soften price competition and increase the industry profits as a result of consumer bounded rationality. Our findings underscore the importance of consumer bounded rationality and show that opaque selling might be even more attractive than previously thought.

doi: 10.1287/mksc.2014.0876pmid: N/A