Conference Sessions - Jesse H. Jones Graduate School of ...

2 - Determining Consumers’ Discount Rates with Field Studies
Song Yao, Northwestern University, Kellogg School of Management,
Evanston, IL, United States of America,
s-yao@kellogg.northwestern.edu, Carl Mela, Jeongwen Chiang,
Yuxin Chen
Because utility/profits, state transitions and discount rates are confounded in dynamic
models, discount rates are typically fixed to estimate the other two factors. Yet these
rate choices, if misspecified, generate poor forecasts and policy prescriptions. Using a
field study wherein cellphone users transitioned from a linear to three-part tariff
pricing plan, we estimate a dynamic structural model of minute usage and obtain
discount factors that would normally be unidentifiable. The identification rests upon
imputing the utility under linear pricing plans without dynamic structure; then using
these utilities to identify discount rates when consumers were switched to a threepart
tariff where dynamics became material. We find that the estimated segment-level
weekly discount factors (0.86 and 0.91) are much lower than the value typically
assumed in empirical research (0.995). When using a standard 0.995 discount rate,
we find the price coefficients are underestimated by 23%. Moreover, the predicted
intertemporal substitution pattern and demand elasticities are biased, leading to a
27% deterioration in model fit; and sub-optimal pricing recommendations that would
lower potential revenue gains by 74-88%.
3 - Does AMD Spur Intel to Innovate More?
Ronald Goettler, University of Chicago, Booth School of Business,
Chicago, IL, United States of America,
ronald.goettler@chicagobooth.edu, Brett Gordon
We propose and estimate a model of dynamic oligopoly with durable goods and
endogenous innovation to examine the relationship between market structure and
the evolution of quality. Firms make dynamic pricing and investment decisions while
taking into account the dynamic behavior of consumers who anticipate the product
improvements and price declines. The distribution of currently owned products is a
state variable that affects current demand and evolves endogenously as consumers
make replacement purchases. Our work extends the dynamic oligopoly framework of
Ericson and Pakes~(1995) to incorporate durable goods. We propose an alternative
approach to bounding the state space that is less restrictive of frontier firms and yields
an endogenous long-run rate of innovation. We estimate the model for the PC
microprocessor industry and perform counterfactual simulations to measure the
benefits of competition. Consumer surplus is 2.8 percent higher ($2.8 billion per
year) with AMD than if Intel were a monopolist. Innovation, however, would be
higher without AMD present. Counterfactuals reveal that consumer surplus can
actually increase as the market moves toward monopoly, which suggests
policymakers ought to consider the dynamic trade-off lower current consumer
surplus from higher prices for higher future surplus from more innovation.
Comparative statics reveal that competition does induce higher innovation if
consumers have su¢ ciently high preferences for quality and low price sensitivity or if
depreciation of the durable good reduces the degree to which a monopolist competes
with itself over time.
4 - Dynamics of Pricing Strategy and Repositioning Costs
Paul Ellickson, University of Rochester, Simon School of Business,
Rochester, NY, United States of America,
paul.ellickson@simon.rochester.edu, Sanjog Misra, Harikesh Nair
We measure the cost to retailers of changing pricing formats in oligopolistic retail
markets. The choice of pricing strategy is a signficant, but to our knowledge,
unquantified, determinant of price-stickiness. For example, adopting an Everyday
Low Pricing (EDLP) strategy could have significant effects on long-run market
structure, as these firms tend to stick to an initially chosen pricing format for years, if
not decades, to avoid incurring adjustment costs. This could be an important source
of price rigidity. We exploit a unique dataset containing the pricing-format decisions
of all supermarkets in the U.S to measure format-switching costs. The data contain
the format-change decisions of supermarkets in response to a large shock to their
local market positions: the entry of WalMart. We exploit the price-format responses
of supermarkets to WalMart’s entry and infer the repositioning cost using a “revealedpreference”
argument similar to the spirit of Breshnahan & Reiss (1990). The
interaction between players in a market is modeled as a dynamic discrete game. We
find evidence that suggests that the entry patterns of WalMart had a significant
impact on the costs and incidence of switching pricing strategy. Our results add to the
marketing literature on the organization of retail markets, and to a new literature
that discusses implications of marketing pricing decisions for macroeconomic policy.
MARKETING SCIENCE CONFERENCE – 2011 FC09
57
■ FC09
Founders III
Retailing IV: Competition
Contributed Session
Chair: Aharon Hibshoosh, Professor, San Jose State University and Lincoln
University, One Washington Square, San Jose CA 95192,
401 15th Street, Oakland, CA 94612, Oakland, CA, 94612,
United States of America, rhibshoosh@gmail.com
1 - Product Variety Decision: When Specialty Stores Meet with
Big-box Retailers
Jiong Sun, Assistant Professor, Illinois Institute of Technology,
565 W Adams St., Chicago, IL, 60661, United States of America,
jiongs@gmail.com, Tao Chen
Specialty stores carry more varieties in a particular category, while big-box retailers
carry fewer varieties with price advantages. When consumers are unsure about their
taste about different varieties, visiting specialty stores offers consumers an
opportunity to inspect the varieties and resolve their uncertainty. Offering more
varieties may encourage more low-valuation consumers to evaluate and buy the
product from the specialty store, but may also intensify the price competition with
the big box retailer which enjoys high cost efficiency. In this paper, we examine
product variety decisions of specialty stores when facing competition from big-box
retailers. We find that consumers’ transaction cost and valuation heterogeneity play
an important role.
2 - Variety and Cost Pass-through Among Supermarket Retailers
Timothy Richards, Morrison Professor, Arizona State University, 7171
E Sonoran Arroyo Mall, Mesa, AZ, 85212, United States of America,
trichards@asu.edu, Stephen Hamilton, William Allender
The extent to which wholesale price changes are reflected in retail prices is an issue
of critical importance to manufacturers. Theoretical models of cost pass-through in
both the marketing (Tyagi, 1999; Moorthy, 2005) and economics (Bulow and
Pfeiderer, 1983; Nakamura and Zerom, 2010) literatures show that competitive,
single-product retailers will pass a rise in costs along to consumers on a one-to-one
basis if they face perfectly elastic demand. Imperfectly competitive retailers, however,
will absorb some of the change in costs depending upon the curvature of demand,
the competitiveness of local markets, and the structure of retailing costs. Hamilton
(2009) shows that over-shifting, or passing through costs on a more than one-to-one
basis, can occur among imperfectly competitive, multi-product retailers because rising
input costs cause retailers to reduce the number of products they sell, which softens
price competition. We fail to reject this hypothesis using store-level data on breakfast
cereal sales from a large sample of U.S. grocery retailers. Our contribution lies in
explaining the phenomenon of over-shifting in response to changes in wholesale
prices, extending the empirical literature on retail pass-through to multi-product
environments, and documenting the extent to which changes in wholesale prices are
passed through to consumer food prices.
3 - Pricing, Package Size, Advertising and Trade Areas in Spatial
Competition of Retail Warehouse Clubs
Aharon Hibshoosh, Professor, San Jose State University and
Lincoln University, One Washington Square, San Jose CA 95192,
401 15th Street, Oakland, CA 94612, Oakland, CA, 94612,
United States of America, rhibshoosh@gmail.com
Using game theoretical framework, we model intrinsic short run spatial competition
among profit-maximizing Retail Warehouse Clubs RWCs). Traditional modeling of
spatial competition has location and price as the key decision variables of the
marketing mix of each competitor and typically assumes an instantaneously
consumed single product. However, our models assumes that, in the short run store
locations are fixed, and more realistically that besides price, RWCs distinctively
compete on package size and store advertising while offering many products. We
further assume that package size is directly related to RWC’s cost savings due to
economics of scale in purchasing, transportation and inventory management.
Consumer patronage and purchase decisions are complex, as every consumer
minimizes his total purchasing, transportation and holding cost of a portfolio of
products. Usually RWCs do not locate near consumers, as convenience stores do, so
that consumers encounter time constraints and overall transportation costs. Hence,
consumer store visit frequency and average product quantity demanded per visit are
often institutionally dependent. Distinctively, the package size offered by an RWC is
typically large and the consumer incurs high inventory carrying cost when
purchasing non-instantaneously consumed products. The indivisibility of package size
raises non-trivial technical and substantive consequences. Specifically, for inventory
path valuation, we employ continued fractions and the classical Euclidean Algorithm.
The competition is modeled as a sequential game where package size equilibrium is
determined prior to price equilibrium. We derive explicit parametric game equilibria
solutions for price, package size, store advertising, trading area and profit.