Baojun Jiang

Collaborative Consumption: Strategic and Economic Implications of Product Sharing

Recent technological advances in online and mobile communications have enabled collaborative consumption or product sharing among consumers on a massive scale. Collaborative consumption has emerged as a major trend as the global economic recession and social concerns about consumption sustainability lead consumers and society as a whole to explore more efficient use of resources and products. We develop an analytical framework to examine the strategic and economic impact of product sharing among consumers. A consumer who purchased a firm’s product can derive different usage values across different usage periods. In a period with low self-use value, the consumer may generate some income by renting out her purchased product through a third-party sharing platform as long as the rental fee net of transaction costs exceeds her own self-use value. Our analysis shows that transaction costs in the sharing market have a non-monotonic effect on the firm’s profits, consumer surplus, and social welfare. We find that when the firm strategically chooses its retail price, consumers’ sharing of products with high marginal costs is win-win for the firm and the consumers whereas their sharing of products with low marginal costs can be lose-lose. Further, in the presence of the sharing market, the firm will find it optimal to strategically increase its quality, leading to higher profits but lower consumer surplus.

Signaling Through Price and Quality to Consumers with Fairness Concerns

Consumers with inequity aversion experience some psychological disutility when buying products at unfair prices. Empirical evidence and behavioral research have suggested that consumers may perceive a firms price as unfair when its profit margin is too high relative to consumers’ surplus. The authors develop an analytical framework to investigate the effects of the consumers inequity aversion on a firms optimal pricing and quality decisions. They highlight several findings. First, because of the consumers uncertainty about the firms cost, the firms optimal quality may be nonmonotone with respect to the degree of the consumers inequity aversion. Second, stronger inequity aversion makes an inefficient firm worse off but may benefit an efficient firm. Third, stronger inequity aversion by the consumer can actually lower the consumers monetary payoff (economic surplus) because the firm may reduce its quality to a greater extent than it reduces its price. Finally, as the expected cost efficiency in the market decreases, both the expected quality and the social surplus may increase rather than decrease.

Signaling Through Pricing by Service Providers with Social Preferences

In many service markets such as consulting, auto repair, financial planning, and healthcare, the service provider may have more information about the customers 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 customers 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 customers condition whether serious or minor. We show that in a less ethical market, a self-interested provider will charge different prices based on the customers 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 customers ex ante expected surplus might be lower in a more ethical market than in a less ethical one.

To Share or Not to Share: Demand Forecast Sharing in a Distribution Channel

This paper studies information sharing in a distribution channel where the manufacturer possesses better demand-forecast information than the downstream retailer. We examine three information-sharing formats: no information sharing (i.e., the manufacturer ex ante commits to not sharing its forecast), voluntary information sharing (i.e., the manufacturer makes the sharing decision ex post after receiving the forecast), and mandatory information sharing (i.e., the manufacturer is mandated to share its forecast). We characterize the equilibrium outcomes under the three sharing formats and investigate the firms’ preferences regarding these formats. It is shown that when the retailer is risk-neutral, both firms are indifferent between voluntary and mandatory sharing. Among the three formats, ex ante, the retailer prefers the no-sharing format whereas the manufacturer prefers the mandatory-sharing format. In addition, we find that a more accurate forecast benefits both firms under voluntary- and mandatory-sharing formats, but may hurt both firms under the no-sharing format. Finally, we show that risk aversion plays a critical role in the firms’ sharing decisions and the impact of forecast accuracy. Specifically, when the retailer is risk-averse, the manufacturer may prefer the no-sharing format over the voluntary-sharing format, and improving forecast accuracy may hurt both firms even under voluntary sharing.

Quality and Pricing Decisions in a Market with Consumer Information Sharing

We provide a dynamic, game-theoretic model to examine a firm’s quality and pricing decisions for its new experience goods. Early consumers do not observe product quality prior to purchase but can learn it after purchase and share that product-quality information with later consumers—for example, through online reviews. Both the firm’s quality decision and its cost efficiency are the firm’s private information and not directly observed by the consumer. The early consumers can make a rational inference from the firm’s price about its cost and quality taking into account the firm’s profit incentive from the later informed consumers. We find that in equilibrium a more cost-efficient firm chooses higher quality than does an inefficient firm. One might intuit that a firm will offer higher quality if its high efficiency is known to consumers than if its efficiency is not known, because it will no longer need to convince consumers that it is not the inefficient firm. Our analysis shows that, surprisingly, the opp...

Consumer Search on Online Retail Platform

On an online retail platform such as Amazon.com, many independent sellers sell differentiated products and pay the platform a referral fee (or commission) that is a percentage of the sales revenue. Consumers can search on the platform to learn the sellers’ prices as well as how well the products match their needs. With advances in mobile technology and improvements in customer experience on these platforms, consumers’ search cost has significantly decreased. Ex ante, consumers do not know the product prices, nor how well the products match their preferences. They can sequentially search to learn each product’s price and match level. This paper studies how a lower search cost affects a platform’s and the sellers’ optimal pricing decisions and their profits. Contrary to the conventional wisdom that a lower search cost on the platform will lead to more intense competition and make the sellers worse off, our analysis reveals that a lower search cost can increase the sellers’ expected profits, because it can increase the market demand — more consumers will search and buy on the platform because they are more likely to find a better matched product for which they are willing to pay more. We show that the retail platform can always benefit from a lower search cost if it optimally adjusts its referral fee. Interestingly, it can be optimal for the platform to lower its fee if the lowered search cost significantly increases the demand elasticity, in which case the double-marginalization problem in the channel is alleviated, leading to win-win-win for the platform, the sellers and the consumers. By contrast, if the lowered search cost does not significantly increase the demand elasticity, the platform’s optimal referral fee will be higher, which will exacerbate the double-marginalization problem, thereby leading to higher retail prices in equilibrium but possibly making both consumers and the sellers worse off.

Competitive Implications of Consumer Fairness Concerns

When consumers perceive that a firm’s price or markup is unfairly high, they become less willing to purchase that firm’s product. Hence, one might intuit that the existence of fair-minded consumers would tend to induce firms to reduce their prices, lowering their profits and increasing the consumers’ surplus. Contrary to this conventional wisdom, our analysis reveals that having a segment of fair-minded consumers in the market has a non-monotonic effect on the firms’ profits. More specifically, if the fraction of consumers having fairness concerns is small, consumers’ fairness concerns can actually alleviate price competition, making firms better off and consumers worse off. Within that range, an increase in the fraction of fair-minded consumers can increase the firms’ profits and reduce the consumers’ surplus. But when the fraction of fair-minded consumers is sufficiently high, the firms will compete more aggressively, in which case consumers’ fairness concerns will benefit consumers and reduce the firms’ profits.

Comment on 'Strategic Information Management Under Leakage in a Supply Chain'

Anand and Goyal (2009) propose a horizontal differentiation model to study information leakage and demand signaling in a supply chain. The authors present a composite equilibrium consisting of separating and pooling outcomes in different parameter regions and claim that it satisfies the Intuitive Criterion. We show that their analysis for the pooling equilibrium has errors and also that all pooling outcomes are actually eliminated by the Intuitive Criterion. The positive note is that if the undefeated equilibrium or lexicographical maximum sequential equilibrium (LMSE) refinement is adopted, a similar composite equilibrium will be achieved, which will lead to qualitatively the same results as in the original paper.

Strategic Implications of Keeping Product Value Secret from Competitor’s Customers

Customers can sometimes learn unanticipated or hidden use value of a firm’s product whereas the non-customers remain uninformed about that extra value. A monopolist will increase its profit by informing the non-customers of its product’s hidden value. However, our analysis reveals that this may not be true when the firm faces competition in the market—the firm may actually make a higher profit if it keeps its hidden value secret from its competitor’s customers even if advertising to inform those customers is costless. This is because no advertising leads to information heterogeneity among consumers about the existence of the firm’s hidden value, which gives an incentive for both firms to continue targeting their own existing customers rather than poaching each other’s customers, alleviating price competition and increasing firms’ profits. This beneficial strategic effect of keeping some product value secret from the competitor’s customers can persist even when the firms anticipate the hidden value and compete more aggressively for customers in the early period. Our research suggests that firms can benefit from an “under-promise and over-deliver” strategy if they refrain from communicating their extra value to the competitor’s customers. Moreover, positive word of mouth about a firm’s product will not necessarily benefit the firm and can in fact make all firms worse off.

Dynamic Pricing and Price Commitment of New Experience Goods

This article develops a dynamic model to examine how a firm selling non-durable experience goods can signal its high quality with dynamic spot-pricing or price commitment. Since consumers who buy and use the product will learn the quality of the product, the firm’s early-period price will endogenously determine the fraction of informed consumers in the later period. Without credible price commitment, the high-quality firm will prefer the pooling outcome in the first period, and in the second period, both types of firms will separate and target only the first-period buyers. By contrast, with credible price commitment, the high-quality firm will be able to profitably signal its quality by lowering its first-period price or increasing its second-period price from its first-best price. Credible price commitment will benefit the high-quality firm by lowering its signaling cost, but can either increase or decrease consumer surplus and social welfare. Furthermore, we show that a longer time horizon can allow the high-quality firm to signal its quality costlessly, by maintaining its high first-best price for all periods.