9 episodes

In this paper, we study how a retailer can benefit from acquiring consumer taste information in the presence of competition between the retailers store brand (SB) and a manufacturers national brand (NB). In our model, there is ex-ante uncertainty about consumer preferences for distinct product features, and the retailer has an advantage in resolving this uncertainty because of his close proximity to consumers. Our focus is on the impact of the retailers information acquisition and disclosure strategy on the positioning of the brands. Our analysis reveals that acquiring taste information allows the retailer to make better SB positioning decisions. Information disclosure, however, enables the manufacturer to make better NB positioning decisions – which in return may benefit or hurt the retailer. For instance, if a particular product feature is quite popular, then it is beneficial for the retailer to incorporate that feature into the SB, and inform the manufacturer so that the NB also includes this feature. Information sharing, in these circumstances, benefits both the retailer and the manufacturer, even though it increases the intensity of competition between the brands. But, there are situations in which the retailer refrains from information sharing so that a potentially poor positioning decision by the NB makes the SB the only provider of the popular feature. The retailer always benefits from acquiring information. However, it is beneficial to the manufacturer only if the retailer does not introduce an SB due to the associated high fixed cost.

Brand positioning and consumer taste information ESMT European School of Management and Technology

    • Business

In this paper, we study how a retailer can benefit from acquiring consumer taste information in the presence of competition between the retailers store brand (SB) and a manufacturers national brand (NB). In our model, there is ex-ante uncertainty about consumer preferences for distinct product features, and the retailer has an advantage in resolving this uncertainty because of his close proximity to consumers. Our focus is on the impact of the retailers information acquisition and disclosure strategy on the positioning of the brands. Our analysis reveals that acquiring taste information allows the retailer to make better SB positioning decisions. Information disclosure, however, enables the manufacturer to make better NB positioning decisions – which in return may benefit or hurt the retailer. For instance, if a particular product feature is quite popular, then it is beneficial for the retailer to incorporate that feature into the SB, and inform the manufacturer so that the NB also includes this feature. Information sharing, in these circumstances, benefits both the retailer and the manufacturer, even though it increases the intensity of competition between the brands. But, there are situations in which the retailer refrains from information sharing so that a potentially poor positioning decision by the NB makes the SB the only provider of the popular feature. The retailer always benefits from acquiring information. However, it is beneficial to the manufacturer only if the retailer does not introduce an SB due to the associated high fixed cost.

    Brand positioning and consumer taste information

    Brand positioning and consumer taste information

    Freemium pricing: Evidence from a large-scale field experiment

    Freemium pricing: Evidence from a large-scale field experiment

    Firms commonly run field experiments to improve their freemium pricing schemes. However, they often lack a framework for analysis that goes beyond directly measurable outcomes and focuses on longer term profit. We aim to fill this gap by structuring existing knowledge on freemium pricing into a stylized framework. We apply the proposed framework in the analysis of a field experiment that contrasts three variations of a freemium pricing scheme and comprises about 300,000 users of a software application. Our findings indicate that a reduction of free product features increases conversion as well as viral activity, but reduces usage – which is in line with the framework’s predictions. Additional back-of-the-envelope profit estimations suggest that managers were overly optimistic about positive externalities from usage and viral activity in their choice of pricing scheme, leading them to give too much of their product away for free. Our framework and its exemplary application can be a remedy.

    Consumer choice under limited attention when options have different information costs

    Consumer choice under limited attention when options have different information costs

    Consumers often do not have complete information about the choices they face and therefore have to spend time and effort in acquiring information. Since information acquisition is costly, consumers have to trade-off the value of better information against its cost, and make their final choices based on imperfect information. We model this decision using the rational inattention approach and describe the rationally inattentive consumer’s choice behavior when she faces options with different information costs. To this end, we introduce an information cost function that distinguishes between direct and inferential information. We then analytically characterize the optimal behavior and derive the choice probabilities in closed-form. We find that non-uniform information costs can have a strong impact on product choice, which gets particularly conspicuous when the product alternatives are otherwise very similar. It can also lead to situations where it is disadvantageous for the seller to provide easier access to information for a particular product. Furthermore, it provides a new explanation for strong failure of regularity of consumer behaviour, which occurs if the addition of an inferior – never chosen – product to the choice set increases the market share of another existing product.

    Design for reusability and product resuse under radical innovation

    Design for reusability and product resuse under radical innovation

    Many industries, including consumer electronics and telecommunications equipment, are characterized with
    short product life-cycles, constant technological innovations, rapid product introductions, and fast obsoles-
    cence. Firms in such industries need to make frequent design changes to incorporate innovations, and the
    effort to keep up with the rate of technological change often leaves little room for the consideration of product
    reuse. In this paper, we study the design for reusability and product reuse decisions in the presence of both
    a known rate of incremental innovations and a stochastic rate of radical innovations over time. We formulate
    this problem as a Markov Decision Process. Our steady-state results con rm the conventional wisdom that a
    higher probability of radical innovations would lead to reductions in the rm's investments in reusability as
    well as the amount of reuse the rm ends up doing. Interestingly, the design for reusability decreases much
    more slowly than the actual reuse. We identify some speci c scenarios, however, where there is no tradeoff
    between the possibility of radical innovations and the rms reusability and reuse decisions. Based on over
    425,000 problem instances generated over the entire range of model parameters, we also provide insights
    into the negative impact of radical innovations on rm pro ts, but show that the environmental impact of
    increased radical innovation is not necessarily negative. Our results also have several implications for policy
    makers seeking to encourage reuse.

    Pricing when customers have limited attention

    Pricing when customers have limited attention

    We study the optimal pricing problem of a firm facing customers with limited attention and capability to
    process information about the value (quality) of the offered products. We model customer choice based on
    the theory of rational inattention in the economics literature, which enables us to capture not only the
    impact of true qualities and prices, but also the intricate effects of customer’s prior beliefs and cost of
    information acquisition and processing. We formulate the firm’s price optimization problem and characterize
    the pricing and revenue implications of customer’s limited attention. We test the robustness of our results
    under various modelling generalizations such as prices signalling quality and customer heterogeneity, and
    study extensions such as multiple products, competition, and joint inventory and pricing decisions. We also
    show that using alternative pricing policies that ignore the limited attention of customers or their ability
    to allocate this attention judiciously can potentially lead to significant profit losses for the firm. We discuss
    the managerial implications of our key findings and prescribe insights regarding information provision and
    product positioning.

    Financing capacity investment under demand uncertainty

    Financing capacity investment under demand uncertainty

    This paper studies the interplay between the operational and financial facets of capacity investment. We consider the capacity choice problem of a firm with limited liquidity and whose access to external capital markets is hampered by moral hazard. The firm must therefore not only calibrate its capacity investment and the corresponding funding needs, but also optimize its sourcing of funds. Importantly, the set of available sources of funds is derived endogenously and includes standard financial claims (debt, equity, etc.). We find that when higher demand realizations are more indicative of high effort, debt financing is optimal for any given capacity level. In this case, the optimal capacity is never below the efficient capacity level but sometimes strictly above that level. Further, the optimal capacity level increases with the moral hazard problem's severity and decreases with the firm's internal funds. This runs counter to the newsvendor logic and to the common intuition that by raising the cost of external capital and hence
    the unit capacity cost, financial market frictions should lower the optimal capacity level. We trace the value of increasing capacity beyond the efficient level to a bonus effect and a demand elicitation effect. Both stem from the risk of unmet demand, which is characteristic of capacity decisions under uncertainty.

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