James D. Hess

Direct Marketing, Indirect Profits: A Strategic Analysis of Dual-Channel Supply-Chain Design

The advent of e-commerce has prompted many manufacturers to redesign their traditional channel structures by engaging in direct sales. The model conceptualizes the impact of customer acceptance of a direct channel, the degree to which customers accept a direct channel as a substitute for shopping at a traditional store, on supply-chain design. The customer acceptance of a direct channel can be strong enough that an indepent manufacturer would open a direct channel to compete with its own retailers. Here, direct marketing is used for strategic channel control purposes even though it is inefficient on its own and, surprisingly, it can profit the manufacturer even when so direct sales occur. Specifically, we construct a price-setting game between a manufacturer and its independent retailer. Direct marketing, which indirectly increases the flow of profits through the retail channel, helps the manufacturer improve overall profitability by reducing the degree of inefficient price double marginalization. While operated by the manufacturer to constrain the retailers pricing behavior, the direct channel may not always be detrimental to the retailer because it will be accompanied by a wholesale price reduction. This combination of manufacturer pull and push can benefit the retailer in equilibrium. Finally, we show that the mere threat of introducing the direct channel can increase the manufacturers negotiated share of cooperative profits even if price efficiency is obtained by using other business practices.

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.

Bricks or Clicks? Consumer Attitudes toward Traditional Stores and Online Stores

Abstract Determining what consumers value, and how online stores compare to traditional stores on valued attributes is a necessary first step in understanding the relative benefits of e-commerce. In this paper, we measure consumers’ valuation of online stores compared to traditional stores by measuring the consumers’ perceptions of the performance of online stores on 18 attributes, as well as the importance of each of those attributes. These individual perceptions and preferences from a web-based and paper-based survey of 224 shoppers are combined in a self-explicated multi-attribute attitude model. The findings show that, overall, all product categories in our survey of online stores are less acceptable than traditional stores. Online stores are perceived as having competitive disadvantages with respect to shipping and handling charges, exchange/refund policy for returns, providing an interesting social or family experience, helpfulness of salespeople, post-purchase service, and uncertainty about getting the right item. The advantages that online stores have in areas such as brand-selection/variety and ease of browsing do not entirely overcome the disadvantages listed above.

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.

That's What I Thought I Wanted? Miswanting and Regret for a Standard Good in a Mass-Customized World

How can a standardized product survive in a mass-customized world? This requires understanding that consumers often experience problems predicting their future hedonic reactions to new experiences (such as custom products), leading to feelings of regret. This form of regret occurs not because the custom product differs from specifications, but because consumers miswanted the design they ordered. Our analytic model shows that regret aversion induces consumers to design custom products to reflect the attributes of the available standard products. Consequently, regret-averse consumers may choose the standard product rather than place a custom order. The number of available standard products, however, moderates both these effects. Two experiments empirically substantiate the key predictions of the analytical model: (a) the custom products resemblance to the standard product grows with regret aversion associated with miswanting, (b) there exists a segment of “regretfully loyal consumers” for the standard product in a mass-customized world and it expands with regret aversion, (c) both the above effects are weakened by the presence of a second standard product, and (d) the custom product can increase its market share when the number of standard products increases.

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.

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.

Who benefits from large rebates: Manufacturer, retailer or consumer?

Abstract Previous research has shown that price discrimination motivates manufacturers to offer coupons and rebates when their products are sold directly to consumers. This paper shows that manufacturer rebates can be profitable even if price discrimination does not occur, when the product is sold through a channel of distribution.

Imperfect Information and Credit Rationing: Comment

In an article in this Journal Jaffee and Russell [1976] developed a model of loan-markets to explain the rationing of credit. It will be shown that they confused competitive supply curves with zero profit curves, and when this is corrected, the competitive model no longer supports the conclusion that credit can be profitably rationed. Borrowers maximize utility by taking out loans L, at interest rate factors R, but on average repay only a fraction A of the debt. The repayment factor declines with increases in total debt:

The equivalence of team theory's integral equations and a Cauchy system: sensitivity analysis of a variational problem

Team decision theory studies the problem of how a group of decision makers should use information to coordinate their actions. Mathematically, the task is to find functions that maximize an objective functional. The Euler equations take the form of a system of integral equations. In this paper, it will be shown that a class of such integral equations has solutions that are identical to the solutions of a system of initial-valued integrodifferential equations. This Cauchy system describes the sensitivity of the solutions to underlying parameters and provides an efficient technique for solving difficult team decision problems. An analysis of a profit maximizing firm demonstrates the usefulness of the Cauchy system.