Eitan Gerstner

Cyclic Pricing by a Durable Goods Monopolist

In the model of this paper a monopoly seller of a durable good holds periodic sales as a means of price discrimination. A new cohort of consumers enters the market in each period, interested in purchasing the good either immediately or after a delay. Within each cohort, consumers vary in their tastes for the good. Under broad conditions, the seller will vary the price over time. In most periods, he will charge a price just low enough to sell immediately to consumers with a high willingness to pay. Periodically, however, he will drop the price far enough to sell to an accumulated group of consumers with a low willingness to pay.

Return Policies and the Optimal Level of "Hassle"

Abstract Return policies vary significantly across retailers; some offer very generous return policies, while others impose many restrictions on returns. We employ an analytical model to help identify potential causes for variation among retailers’ return policies. A retailer is more likely to offer a low-hassle return policy when: 1) its products’ benefits cannot be consumed in a short period of time; 2) its product line offers opportunities for cross-selling; and 3) it can obtain a high salvage value for returned merchandise. Data collected from a variety of retail stores gives support to our theoretical predictions.

Controlling product returns in direct marketing

Many direct marketers offer price refunds to unsatisfied consumers, but as a result some consumers order products with no intention of keeping them. We show that such inappropriate returns can be controlled in a profitable way by imposing nonrefundable charges and that these charges increase with the value of the merchandise ordered. Data collected from clothing mail-order catalogs is consistent with our theory. The shipping and handling charges of these catalogs are usually nonrefundable and increase with the value of the merchandise ordered, even when the actual shipping and handling costs are constant.

Managing Dissatisfaction How to Decrease Customer Opportunism by Partial Refunds

Previous research emphasizes the benefits of generous refunds as part of overall complaint management service policy, yet recent empirical evidence suggests that many retailers have concerns about abusive returns and hesitate to fully compensate dissatisfied customers. We present an analysis of three refund policies-no questions asked, no refunds, and verifiable problems only-and show that no questions asked is the most efficient way to handle consumer opportunism.

The effects of expert quality evaluations versus brand name on price premiums

Investigates the extent to which expert evaluations of quality impact price premiums of national brands over the store brands. Using data from Consumer Reports, finds that the average quality of store brands exceeds the average quality of national brands in 22 out of 78 product categories. Yet store brands typically do not charge price premiums, while national brands do (28.7 percent price premium on average). When national brands have higher quality, however, they increase the price premium from 28.7 percent to 50.4 percent on average. Regression analysis predicts that a national brand would command 37 percent price premium over a store brand that offers the same quality, a finding that highlights the handsome returns on building brand equity.

Why Do Hot Dogs Come in Packs of 10 and Buns in 8s or 12s? A Demand-Side Investigation

This paper presents a theory that yields insight into the determination of package prices and sizes. Consumer heterogeneity in consumption rates, storage costs, and transactions costs (costs of making trips to the store) explains differences in package sizes and unit prices. In the model, fully-informed consumers and a monopolist seller pursue optimizing behavior. The seller chooses package sizes and prices to maximize profits, and the consumers select package sizes that maximize their utilities. The authors show that consumer heterogeneity may induce the seller to offer more than one size and that larger sizes would be sold either at unit-price discounts or unit-price premiums. Welfare implications and empirical tests of the theory are presented. Copyright 1987 by the University of Chicago.

Setting Referral Fees in Affiliate Marketing

Affiliate programs offer affiliates referral fees in return for directing potential customers into a merchants Web site. Affiliates are commonly paid based on the number of leads converted by the merchant into customers (pay-per-conversion) or based on the number of leads referred to the merchant (pay-per-lead). Given the prevalence of both, interesting questions for research are as follows: Why do both formats prevail? Under what conditions is one format preferred over the other? The authors find that pay-per-lead is more profitable when a merchant negotiates a separate deal with an affiliate. In this case, pay-per-conversion is not optimal for the affiliation alliance because it leads to suboptimal pricing by the merchant. In contrast, pay-per-lead is less profitable than pay-per-conversion for a merchant that works with a large number of affiliates all under the same terms because it is susceptible to bogus referrals that cannot be converted into customers.

Selling with “Satisfaction Guaranteed”

Satisfaction Guaranteed is defined as a selling policy assuring that no consumer is worse off after purchase. The authors show that for a wide spectrum of guarantee policies, the most profitable policy is a Satisfaction Guaranteed policy. Setting a price equal to the willingness to pay of satisfied customers, but generously compensating dissatisfied customers for all costs involved, this policy can be a “creative device” to capture back-added economic value created for consumers through the guarantee. Comparing this policy with a no-guarantee policy, a Satisfaction Guaranteed policy comes with a higher price in a monopoly market and in a competitive market. Conditions under which selling with a Satisfaction Guaranteed policy is more profitable than selling without it are derived. Although this policy seems to be an attractive offer to consumers, the authors show that because of its high price, it may not. Easy-to-satisfy consumers are better off without the Satisfaction Guaranteed policy.

For a Few Cents More: Why Supersize Unhealthy Food?

Health-care experts believe that increases in portion sizes served by food vendors contribute to the obesity epidemic. This paper shows that food vendors can profit handsomely by using supersizing strategies where regular portion sizes are priced sufficiently high to discourage price-conscious consumers from selecting them, and the prices for enlarging food portions are set so low that these customers are tempted to order the larger portion sizes and overeat. Setting aside the impact of obesity on health-care costs, we show that using supersizing to steer customers toward consuming excessive amounts of food can destroy value from a social perspective; thus this social value destruction trap adds another justification for pressuring food vendors to reduce supersizing for unhealthy food. As a public policy response, we consider how “moderating policies” may counter these effects through measures designed specifically to encourage eating in moderation by applying supersizing bans, taxes, and warnings.

Demarketing as a differentiation strategy

Demarketing discourages consumers from buying. This paper shows that demarketing can be a profitable alternative when differentiation through product improvements is not cost effective. The impact of differentiating demarketing on profit, market share, consumers, and total welfare is investigated.