Chakravarthi Narasimhan

Markov chain Monte Carlo and models of consideration set and parameter heterogeneity

Abstract In this paper the authors propose an integrated consideration set-brand choice model that is capable of accounting for the heterogeneity in consideration set and in the parameters of the brand choice model. The model is estimated by an approximation free Markov chain Monte Carlo sampling procedure and is applied to a scanner panel data. The main findings are: ignoring consideration set heterogeneity understates the impact of marketing mix and overstates the impact of preferences and past purchase feedback even when heterogeneity in parameters is modeled; the estimate of consideration set heterogeneity is robust to the inclusion of parameter heterogeneity; when consideration set heterogeneity is included the parameter heterogeneity takes on considerably less importance; the promotional response of households depends on their consideration set even if the underlying choice parameters are identical.

An Empirical Analysis of Sales-Force Compensation Plans

Among the array of direct and indirect methods of motivation and control available to the sales manager is sales-force compensation. In this article, the authors summarize theoretical predictions from the economics, marketing, finance, and accounting literatures on the structure of optimal sales-force compensation plans. Guided by these insights, they then construct empirical models to quantify the effect of various sales-force factors, firm and product factors, and market factors on compensation. Using data from 286 firms in 39 industries, the authors examine determinants of incentive components and total pay and the optimal horizon for incentive pay. Copyright 1992 by University of Chicago Press.

Information and Inventory in Distribution Channels

We examine the trade-offs between demand information and inventory in a distribution channel. While better demand information has a positive direct effect for the manufacturer in improving the efficiency of holding inventory in a channel, it can also have the strategic effect of increasing retail prices and limiting the extraction of retail profits. Having inventory in the channel can help the manufacturer to manage retail pricing behavior while better extracting retail surplus. Thus, even if the information system is perfectly reliable, the manufacturer might not always want to institute an information-enabled channel over a channel with inventory. We show this first in a channel with a single retailer, where the channel with perfect information is preferred over the channel with inventory only if the marginal cost of production is sufficiently high. We also analyze a channel with an imperfectly reliable information system and find that if the manufacturer were to choose the precision of the demand information system, it might not prefer perfect information, even if such information was costless to acquire. In a channel with competing retailers, the channel with perfect information is preferred when retail competition is sufficiently intense. Thus, the presence of inventory can play a role in managing competition among retailers and in helping the manufacturers to appropriate surplus especially when retailers are sufficiently differentiated.

Decomposing Promotional Effects with a Dynamic Structural Model of Flexible Consumption

In this article, the authors offer a methodology to decompose the effects of price promotions into brand switching, stockpiling, and change in consumption by explicitly allowing for consumer heterogeneity in brand preferences and consumption needs. They develop a dynamic structural model of a household that decides when, what, and how much to buy, as well as how much to consume, to maximize its expected utility over an infinite horizon. By making certain simplifying assumptions, the authors reduce the dimensionality of the problem. They estimate the proposed model using household purchase data in the canned tuna and paper towels categories. The results from the model offer insights into the decomposition of promotional effects into its components. This could help managers make inferences about which brands sales are more responsive to stockpiling or increase in consumption expansion and how temporary price cuts affect future sales. Contrary to previous literature, the authors find that brand switching is not the dominant force for the increase in sales. They show that brand-loyal consumers respond to a price promotion mainly by stockpiling for future consumption, whereas brand switchers do not stockpile at all. The authors also find that heavy users stockpile more, whereas light users mainly increase consumption when there is a price promotion.

Product Line Pricing in a Supply Chain

A vertically integrated channel would prefer to coordinate the pricing of its products. In this paper, we investigate drivers of product line pricing decisions in a bilateral monopoly where a manufacturer produces and sells two substitutable or complementary products to a retailer. In a two-stage game, each firm commits credibly in the first stage to a pricing scheme within its own organization: product line pricing (PLP) or nonproduct line pricing (NPLP). In the second stage, depending on the relative balance of power in the supply chain, the firms engage in either a Nash or a leader-follower pricing game. We study the equilibrium of the two-stage game under a general symmetric demand function. With strategic interaction between firms, a firm may choose NPLP as the equilibrium pricing strategy. In particular, when the second stage is a leader-follower game, the price leader chooses PLP, and the follower may choose NPLP only if the inefficiency of using NPLP empowers the follower by increasing the demand sensitivity to the leaders margin. When the second stage is a vertical Nash game, whether NPLP occurs in equilibrium depends on the nature of coupling between demand interdependence and vertical strategic dependence: NPLP can be an equilibrium onlyif products are demand substitutes (complements) and vertical strategic dependencies are complementary (substitutable). We find that prisoners dilemma exists in the first stage for both types of second-stage pricing games. In those cases, one firm may have the incentive to commit to a pricing scheme in the first stage prior to its channel partner and steer the supply chain away from prisoners dilemma.

Understanding customer level profitability implications of satisfaction programs

Purpose – Achieving high level of customer satisfaction (CS) involves spending marketing resources in terms of money, managerial time, and focus. Consistent with the return on quality framework this paper aims to look at both the costs and benefits of a satisfaction program.Design/methodology/approach – This paper reports the results of a longitudinal study of a beverage distributor. Two satisfaction surveys were conducted before and after the launch of the program. Profitability was calculated using activity based costing (ABC) principles. The link between changes in satisfaction and changes in profitability was analyzed.Findings – It was found that as a result of the launch of satisfaction program CS increased significantly, but the weighted least square analysis of the relationship between CS and customer profitability (CP) shows that it does not necessarily result in higher customer profits. CS is found to be positively related to sales volume and gross profits at the customer level. However, a net pr...

National Brand's Response to Store Brands: Throw In the Towel or Fight Back?

Nearly a quarter of all products purchased in U.S. supermarkets and drug stores are store brands SBs. Although the presence of SBs benefits both consumers and retailers, it is a threat to the dominance of the incumbent national brand manufacturers NBMs. When considering the potential threat of an SB, an NBM generally pursues one of three strategies: accommodate, displace, or buffer. Under the accommodation strategy, the NBM repositions the products in his existing product line. Under the displacement strategy, the NBM elects to supply the SB to preempt the entry of the SB supplier. Under the buffering strategy, the NBM adds a defender product, which competes with his own product offering and the new SB. Using a game-theoretic model, we consider a market where consumers are heterogeneous in their valuation of product quality and analyze an NBMs response to an SB threat. We focus on two important drivers: the NBMs ability to differentiate on the quality dimensions and his cost advantage over the outside supplier of SB. To completely characterize the NBMs response, we consider two regimes. In the first regime, the NBM is a monopolist producer. In the second regime, the retailer has the added option of procuring an SB product from an independent, nonstrategic SB manufacturer. By comparing the results from both regimes, we develop a descriptive theory that clarifies the incentives of the NBM to accommodate, displace, or buffer. In doing this, we determine how the NBMs whole product portfolio should be designed, i.e., the positioning quality levels and prices of all its offerings.

Vertical Information Sharing in Distribution Channels

This paper examines the information-sharing behavior of firms in a distribution channel context. While information sharing among firms can occur in a horizontal (among competitors) or vertical (channel members) context, previous attempts at modeling information sharing has primarily been restricted to the horizontal context. For marketers, channel alliances are interesting in view of their growing popularity as witnessed by initiatives like ECR and category management. Such initiatives usually involve the pooling of, often complimentary, information available with manufacturers and retailers. It is argued that such pooling of information should lead to better decision-making and hence it is desirable. However, in practice, category management is often implemented with a somewhat interesting institution of category captain, which appears to be a restricted form of information pooling. It involves the retailer entering into an alliance with only one (of many) supplier in a category, who is accorded the role of category captain. We first analyze the information sharing incentives of the two industry participants, manufacturer and retailer, in a bilateral monopoly. We find that whether sharing will occur or not is crucially dependent on the baseline quality of information available with the firms and on the degree of complementarity of resources that in turn determine how effective information pooling is. Next, using a model of competing symmetric duopolists selling through a common retailer, we show that information sharing between the alliance partners can sometimes give rise to the emergence of the so-called category captain, i.e., an exclusive alliance. The total channel profits and those of the partners in alliance go up. This increased profit is due to higher average wholesale prices, which can be interpreted as reduction in price promotions, a key goal of the category management initiative. The model generates predictions about when information- sharing alliances are more likely and can also be extended to answer managerially relevant question for retailers, i.e., who to choose as category captain?

Measuring Quality Perceptions

The measurement and management of product quality is an important factor in maintaining a firms competitive edge. In this paper we (i) describe a procedure to obtain quality perceptions from users of office copiers, (ii) model the relationship between perceived quality and the underlying engineering attributes, and (iii) compute price-quality elasticities and suggest segmentation procedures.

Quantifying the competitive impact of a new entrant

Abstract Quantifying the impact on sales and profits of existing firms due to a competitive entry is an important practical problem from both a managerial and a policy perspective. In this article we apply the well-known gravitational model to measure the sale impact of the planned entry of a new shopping center. The use of the model in this context is illustrated through two actual applications. Data were collected from a telephone survey of a random sample of local households. Respondents were asked a variety of questions about their shopping behavior, including their eatings of the arreactiveness of the new and existing malls. In addition, we collected the usual data on mall size, travel time, population size, etc. The gravity model was formulated as a logit model and estimated by the well-known maximum likelihood procedure. It was found that mall choice could be explained by a simple model that used the following three variables: mall size, travel time, and the attractiveness of the mall. The estimated model was then used to quantify the competitive impaxct of a new shopping center under alternative scenatios. The article concludes with some recommendations on the practical use of such models.