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

2 - R&D Spillover and Product Differentiation in Fully Covered Market
Xin Wang, University of Cincinnati, 402 Carl H. Lindner Hall, 2925
Campus Green Drive, Cincinnati, OH, 45221, United States of
America, wang2x5@mail.uc.edu, Yuying Xie
The literature is limited on the effect of R&D spillover on the strategic choice of
product quality. A recent study finds that the externality of R&D spillover
unambiguously enhances the strategic development of quality for both the high-end
producer and the low-end producer, which is contrary to the traditional viewpoint
that spillovers decrease the spillover supplier’s incentive to improve. This paper
explores the spillover effects on quality when markets are fully covered. Three
scenarios are analyzed by using a popular setting of duopolistic competition in a
quality-price two-stage game. Scenario 1 is a simultaneous game without production
cost. We find that the firm producing at the low-end has a corner solution, and
technology spillovers have no effect on either firm due to the corner solution.
Scenario 2 considers asymmetric production cost by assuming a unit cost to the highend
producer. We find that the spillovers improve quality of the low-end firm but
discourage the high-end firm to innovate. Scenario 3 considers the combination of
market leadership and two-way spillovers. Specifically, we assume the low-end firm
to be the leader in stage 2. We find that both qualities are improved due to
technology spillovers. Overall, these results show that R&D spillovers have diverse
effects on product qualities in various circumstances. The question of how technology
spillovers influence foreign investments in product quality requires careful
examinations of consumer preferences, the nature of products, and the
competitiveness of firms.
3 - Downsizing or Price Competition Responding to Increasing
Input Cost
Yeong Seon Kang, Doctoral Student, University of California, Irvine,
The Paul Merage School of Business, Irvine, CA, 92697-3125, United
States of America, yskang@uci.edu
This study is to determine the firm’s optimal strategy in choosing between a price
increase or downsizing the package size under conditions of a spatially differentiated
market and each consumer’s diminishing marginal utility as product size increases.
When a manufacturing firm faces a steep increase in its variable input cost, the firm
usually increases the price of its product to share the loss in its profits with
consumers. Downsizing can be an alternative strategy for the firm instead of a price
increase. We assume that a firm downsizes the product package while maintaining its
price. We find that the degree of competition and the amount of input cost increase
affect a firm’s optimal strategy. If the rival firm chooses to increase the price when
responding to an input cost increase, then the firm’s increasing price is always a
dominant strategy. When the degree of competition is sufficiently large and the
amount of input cost increase is sufficiently small, both firms choose a price increase
in a unique Nash equilibrium. When the degree of competition is sufficiently small or
when the amount of the input cost increase is sufficiently large, then both firms
choose a price increase or both firms choose downsizing in equilibrium. Both cases
are Nash equilibria and the former has higher profits than the latter because both
firms pass through the entire amount of the input cost increase to the end consumers
by the price increase. Therefore, both firms’ profits can maintain the same value as
the benchmark case before the input cost increases. We also show that the
asymmetric pairs of a price increase by one firm and downsizing by the other are
never Nash equilibra in our framework, and both firms symmetrically choose the
same strategy in equilibrium.
■ SB05
Legends Ballroom VI
Game Theory V: General
Contributed Session
Chair: Ruhai Wu, Assistant Professor, McMaster University, 1280 Main
Street West, Hamilton, ON, L9G5C5, Canada, wuruhai@mcmaster.ca
1 - Within-firm and Across-firm Search: The Impact on Firms’ Product
Lines and Prices
Anthony Dukes, University of Southern California, Marshall School of
Business, Los Angeles, CA, 90089, United States of America,
dukes@marshall.usc.edu, Lin Liu
Many firms offer a related set of products, all of which are intended to satisfy a
specific consumer need, but each differing on feature, color, or styling. Furthermore,
comparing alternatives within a firm’s product line may be non-trivial for consumers.
But most models of consumer search assume that consumers incur search costs only
when comparing products of different firms. In this research, we examine the
implications when consumers incur costs searching within a firm. Specifically, we
decompose consumer search into within-firm and across-firm components and
examine a model in which firms compete on prices and product line length. We show
that the consideration of within-firm search costs leads to insights not seen in the
prior literature on consumer search. Under certain conditions, as firms’ products
become closer substitutes, consumers search less across firms but more within each
firm, causing firms to expand their product lines. And, unlike across-firm search
costs, an increase in within-firm search cost does not necessarily lead to higher prices.
MARKETING SCIENCE CONFERENCE – 2011 SB05
81
2 - Bounded Rationality in Dynamic Games: Insights into Strategy
Optimization Amid Player Uncertainty
Jennifer Cutler, Duke University, Durham, NC,
United States of America, jennifer.cutler@duke.edu
In boundedly rational paradigms, players of lengthy dynamic games are limited in
how many levels ahead they can think. When selecting a strategy, players must make
several decisions: how far ahead they will choose to think (subject to their cognitive
constraints), how far ahead they believe other players will think, and how to define
higher order beliefs (e.g. player 1’s beliefs about player 2’s beliefs about player 1). We
use analytical and numerical analyses to explore the main effects and interactions of
these decisions on payoff in generalizable dynamic game contexts that are
independent of payoff structure. First, we demonstrate asymmetry in opponent
estimation errors that are too high versus too low, and provide contextual parameters
that moderate and reverse the differences. Second, we explore the effects of
increasing levels of thinking, and show how they interact with opponent estimation
errors. Third, we introduce costly effort, and reevaluate the outcomes for net payoff.
The theoretical results are then demonstrated in several well-known dynamic
marketing games. The results provide new strategic insights for optimizing payoff
amid uncertainty in other players’ abilities. First, contexts in which it is advantageous
to underestimate opponents’ abilities are delineated from contexts in which the
reverse is true. Second, situations in which it is advantageous to restrict one’s own
level of thinking are defined.
3 - Firm Strategies in the “Mid Tail” of Platform-based Retailing
Baojun Jiang, Carnegie Mellon University, 5000 Forbes Avenue,
Pittsburgh, PA, 15213, United States of America, baojun@cmu.edu,
Kinshuk Jerath, Kannan Srinivasan
While millions of products are sold on its retail platform, Amazon.com itself stocks
and sells only a small fraction of them. Most of these products are sold by third-party
sellers, who pay Amazon a fee for each unit sold. Empirical evidence clearly suggests
that Amazon tends to sell high-demand products and leave long-tail products for
independent sellers to offer. We investigate how a platform owner such as Amazon,
facing ex ante demand uncertainty, may strategically learn from these sellers’ early
sales which of the “mid-tail” products are worthwhile for its direct selling and which
are best left for others to sell. The platform owner’s “cherry-picking” of the successful
products, however, gives an independent seller the incentive to mask any high
demand by lowering his sales with a reduced service level (unobserved by the
platform owner). We analyze this strategic interaction between the platform owner
and the independent seller using a game-theoretic model with two types of sellers –
one with high demand and one with low demand. We show that it may not always
be optimal for the platform owner to identify the seller’s demand. Interestingly, the
platform owner may be worse off by retaining its option to sell the independent
seller’s product whereas both types of sellers may benefit from the platform owner’s
threat of entry. The platform owner’s entry option may reduce the consumer surplus
in the early period though it increases the consumer surplus in the later period. We
also investigate how consumer reviews influence the market outcome.
4 - Repeated Consumption Pattern under Different Pricing Schemes
Ruhai Wu, Assistant Professor, McMaster University,
1280 Main Street West, Hamilton, ON, L9G5C5, Canada,
wuruhai@mcmaster.ca, Suman Basuroy
Consumers with repeated consumptions often sign in long-term pricing contracts,
such as monthly membership, prepaid plan, etc. They estimate their future
consumptions when choosing among different pricing schemes. Their contractual
choices subsequently influence their realized consumptions. In this paper, we develop
a repeated game model studying the consumers’ decisions on pricing schemes and on
repeated consumption. We study the three pricing schemes, namely, pay per visit, Tperiod
(monthly) membership and prepaid K-visit (10-visit) pass. The model shows
that the consumers realize different consumption patterns under different pricing
schemes, and illustrate the consumers’ optimal choices among the pricing schemes.
Interestingly, under certain condition, consumers choose T-period membership even
though it is expected to result a “per-usage” cost higher than that under other pricing
schemes. This outcome is consistent with the finding in Della Vigna and Malmendier
(2006), where the authors explained it as consumers’ overestimation of future
consumption. We also show the firm’s price discrimination solution in context of
design of pricing schemes, given consumers’ contractual and consumption decisions.