Dmitri Kuksov

When More Alternatives Lead to Less Choice

This paper shows that when the alternatives offered to consumers span the preference space (as it would be chosen by a firm), search or evaluation costs may lead consumers not to search and not to choose if too many or too few alternatives are offered. If too many alternatives are offered, then the consumer may have to engage in many searches or evaluations to find a satisfactory fit. This may be too costly and result in the consumer avoiding making a choice altogether. If too few alternatives are offered, then the consumer may not search or choose, fearing that an acceptable choice is unlikely. These two forces result in the existence of a finite optimal number of alternatives that maximizes the probability of choice.

Pricing, Frills, and Customer Ratings

This paper explores whether and how a firm should adapt its strategy in view of consumer use of prior customer ratings. Specifically, we consider optimal pricing and whether the firm should offer an unexpected frill to early customers to enhance their product experiences. We show that if price history is unobserved by consumers, a forward-looking firm should always modify its strategy from single-period optimal one, but it may be optimal to do so by lowering price, by lowering price and offering frills, or by raising price and offering frills, depending on the market growth rate. Specifically, the last strategy becomes optimal when market growth rate is high enough. The results are similar when the price history is observed by consumers, except that no deviation from single-period profit maximization choices is optimal when market growth is low enough. We also analyze whether the firm should prefer that the price information be stated in or left out of consumer reviews. In addition, in considering the effects of consumer heterogeneity, we conclude that the optimal firms effort to affect ratings is higher when the idiosyncratic part of consumer uncertainty is larger.

Information Provision in a Vertically Differentiated Competitive Marketplace

This paper examines the interaction of information provision, product quality, and pricing decisions by competitive firms to explore the following question: in a competitive market where consumers face uncertainty about product quality and/or their preference for quality, which firms---those that sell higher-or lower-quality products---have the higher incentive to provide what type of information? We find that while the higher-quality firm should always provide information resolving consumer uncertainty on product quality, the lower-quality firm under certain conditions will have the higher incentive to and will be the one to provide information resolving consumer uncertainty about their quality preferences. In the analysis, we trace the latter result to competition and to free-riding on the information provision. Specifically, in a monopoly market or when consumer free-riding is restricted by the costliness of store visits, the lower-quality firm would have a lower incentive to provide information resolving consumer preference uncertainty than otherwise. The model is also adapted to examine product returns as a possible strategy of information provision.

Brand Value in Social Interaction

This paper explores the consumer value of publicly associating oneself with a brand image. The economic value of such association to the consumer of a brand is coming from its affect on the information exchange between consumers engaged in a search for partnerships with each other. It turns out that the brand use can be valuable to consumers for communication even when they do not have the proper incentives to make simple conversations valuable or informative. In particular, when the correlation of the interests of agents in a partnership is low, conversations are not very informative, while brand use remains informative and valuable. Furthermore, the more widespread the brand use is, the less truthful (and informative) one can expect conversations to be. In addition, the consumer value of a brand image is shown to have an inverse-U shape in the difficulty of searching, as consumers look for conformity when a search is difficult, and conversations become more and more truthful when a search becomes very easy.

Endogeneity and Individual Consumer Choice

In many markets, there is likely to be correlation both across periods in terms of the choices of one consumer and across consumers in terms of their choices in each period. The former is caused by consumer heterogeneity, and the latter may be the result of demand common shocks across consumers. Furthermore, if firms partially observe these common shocks, their market decisions may end up being endogenous and correlated with the common shocks. Because researchers cannot typically fully observe consumer heterogeneity and the common shocks, the estimation method must account for the endogeneity of firms’ decisions. In this article, the authors present a test for endogeneity under unobserved consumer heterogeneity and common shocks, which is based on a quasi-likelihood estimation method, to estimate the model parameters consistently when endogenous firm behavior, unobserved heterogeneity, and common shocks are present. The test examines the differences in general method of moments coefficient estimates of a model with and without instrumenting for the explanatory variables. The authors show theoretically that in their estimation method, unobserved heterogeneity does not affect the consistency of the parameter estimates, but if it is not accounted for, endogeneity may bias the results. They present estimation results from simulated and scanner panel data.

Competition in a status goods market

Consumers value status goods because of the impression status-product ownership makes on other consumers, and this impression depends on the actual distribution of ownership in population. Explicitly modeling consumer value of status products as coming from the information the product ownership conveys to other consumers, the authors show that a status-product manufacturer can benefit from a competitors cost reduction because of the competitors price reduction associated with it. In other words, they show that two status products that are (imperfect) substitutes in the consumer utility function may be complements in the profit function. As a consequence, competition could lead to higher prices than the optimal ones under monopoly ownership of both products. The authors confirm the assumptions that consumer value of a status good depends positively on the proportion of desirable type among owners and negatively on the proportion of the desirable type among nonowners in one experiment. Moreover, they find empirical support for the positive effect of a price reduction of one product on the demand for the other product from another experiment.

A Model of the “It” Products in Fashion

One of the characteristics of the fashion marketplace is the unpredictability and apparent randomness of fashion hits. Another one is the information asymmetry among consumers. In this paper, we consider fashion as a means consumers use to signal belonging to a higher social rank and propose an analytical model of fashion hits in the presence of competition and consumers who can coordinate on which product to use. We show that, consistent with the observed market phenomenon, in equilibrium, consumer coordination involves randomization between products chosen, i.e., in randomness of fashion hits. Analyzing optimal consumer choice, we find that whenever low-type consumer demand for a product is positive, a price increase results in a higher probability of high-type consumers choosing this product but lower low-type consumer demand. We also show that although high-type consumers may prefer higher prices that would lead to complete separation of the high-and the low-type consumers through product use, in equilibrium, firms always price as to attract positive demand from low-type consumers. The equilibrium price and profits turn out to be nonmonotonic in the low-type consumer valuation of being recognized as belonging to a higher social rank. Equilibrium profits first increase and then decrease in this valuation.

Search, common knowledge, and competition

Abstract This paper analyzes the effects of buyer search costs and seller private and common knowledge on seller competition. It shows that lack of common knowledge results in the equilibrium price continuously decreasing to the perfectly competitive one as buyer search costs for price decrease from positive for all buyers to zero for all buyers, even if each market agents uncertainty (in the private knowledge) is small. At the same time, if the uncertainty of each seller about buyer valuations is small, the effects of a small change in the search costs or of information structure on pricing may be large (but continuous).

Competition in Consumer Shopping Experience

This paper analyzes the competitive role of retail shopping experience in markets with consumer search costs. We examine how a retailers advantage in providing consumer shopping experience affects its equilibrium pricing and price advertising strategies. We find that if the consumer valuation of a shopping experience is sufficiently low, its effect on retailer strategy is similar to that of quality, and the retailer with the advantage in shopping experience then deploys higher levels of price advertising. On the other hand, when the shopping experience is valuable enough for consumers, it acts akin to price advertising in that it makes it optimal for the retailer with the advantage in shopping experience to eschew price advertising. The optimal competitive investments in consumer shopping experience can be higher than that of a monopoly. The profit impact of shopping experience for a retailer depends on the level of shopping experience: for low levels, the profit impact depends on the difference in the levels between the retailers, but for high enough levels, it depends only on whether the retailers shopping experience level is higher than that of its competitor. In this case, even small differences in shopping experience levels can result in large differences in equilibrium profits.

The Bright Side of Loss Aversion in Dynamic and Competitive Markets

A well-established phenomenon of consumer buying behavior is that consumers evaluate prices relative to a reference point and exhibit loss aversion; i.e., their propensity to buy is more negatively affected by prices above the reference point than it is positively affected by prices below the reference point. The objective of this paper is to analytically examine how the competitive strategy and profitability of firms are affected by the presence of consumer loss aversion in the price dimension. Although we assume that consumer loss aversion increases consumer propensity to search for lower prices, we find that it does not necessarily lead to lower prices or profits when firms compete over multiple periods and when the consumer reference price in subsequent periods is affected by current prices. Specifically, consumer loss aversion could lead to higher prices and profits when consumer valuation is sufficiently high relative to search costs and the proportion of consumers with positive search costs is in an intermediate range. We also show that when forward-looking firms incorporate the negative effect of price promotions on future profits, the equilibrium range of price promotions may actually increase.