Jeffrey D. Shulman

Optimal Reverse Channel Structure for Consumer Product Returns

Consumers often return a product to a retailer because they learn after purchase that the product does not match as well with preferences as had been expected. This is a costly issue for retailers and manufacturers---in fact, it is estimated that the U.S. electronics industry alone spent

Add-on Pricing by Asymmetric Firms

13.8 billion dollars in 2007 to restock returned products [Lawton, C. 2008. The war on returns. Wall Street Journal (May 8) D1]. The bulk of these returns were nondefective items that simply were not what the consumer wanted. To eliminate returns and to recoup the cost of handling returns, many retailers are adopting the practice of charging restocking fees to consumers as a penalty for making returns. This paper employs an analytical model of a bilateral monopoly to examine the impact of reverse channel structure on the equilibrium return policy and profit. More specifically, we examine how the return penalty is affected by whether returns are salvaged by the manufacturer or by the retailer. Interestingly, we find that the return penalty may be more severe when returns are salvaged by a channel member who derives greater value from a returned unit. Also, the manufacturer may earn greater profit by accepting returns even if the retailer has a more efficient outlet for salvaging units.

Assimilation and Contrast in Price Evaluations

This paper uses an analytical model to examine the consequences of add-on pricing when firms are both horizontally and vertically differentiated and there is a segment of boundedly rational consumers who are unaware of the add-on fees at the time of initial purchase. We find that consumers who know the add-on fees can be penalized---and increasingly so---by the existence of boundedly rational consumers. Our consideration of quality asymmetries on base goods and add-ons, plus the inclusion of boundedly rational consumers, leads to several novel findings regarding firm profits. When quality asymmetry is on base goods only and with boundedly rational consumers, add-on pricing can diminish profit for a qualitatively superior firm and increase profit for an inferior firm i.e., a lose--win result, compared to when add-on pricing is prohibited or infeasible. When quality asymmetries exist on both base goods and add-ons and without boundedly rational consumers, the opposite win--lose result prevails. When quality asymmetries exist on both base goods and add-ons and with boundedly rational consumers, the result can be win--win, win--lose, or lose--win, depending on the magnitude of quality differentiation on add-ons. This paper was accepted by J. Miguel Villas-Boas, marketing.

Product Diversion to a Direct Competitor

How are price judgments influenced by the distribution of observed prices for other items in the same category? Processing goals will moderate price-judgment processes. When the processing goal is discrimination, price perceptions will be influenced by variations in range and ranks of prices in a distribution and contrast effects will be observed. For example, lowering the price of the lowest-priced product in a set will increase perceived expensiveness of higher-priced products. When the processing goal is generalization, however, price perceptions will be influenced by variations in the mean of the price distribution, in which case assimilation is observed. For example, lowering the price of the lowest-priced product in a set will decrease perceived expensiveness of higher-priced products. This latter finding is in sharp contrast to findings in the current literature on the effect of price structure on price judgments.

Consumer Uncertainty and Purchase Decision Reversals: Theory and Evidence

A manufacturer will often limit competition among downstream partners by authorizing only a select group of retailers to carry its product. However, it is not uncommon for authorized retailers to create an additional competitor by diverting units to an unauthorized seller. This paper presents an analytical model that demonstrates how diversion from authorized retailers to an unauthorized direct competitor can occur under circumstances not considered by the prior literature. In fact, diversion can represent a prisoners dilemma whereby retailers diminish their own profit by selling to the unauthorized direct seller. The authorized retailers profit loss actually increases as the per-unit diversion costs incurred by the authorized retailer decrease. The model also shows that the unauthorized direct seller earns greater profit by strategically procuring a unilaterally constraining quantity, even though this procurement strategy results in an equivalent increase in the quantity sold by the retailers. Combined, the results identify a new reason for diversion and its consequences for retailers and the unauthorized direct seller.

Strategic Information Transmission in Peer-to-Peer Lending Markets

This research examines how prepurchase information that reduces consumer uncertainty about a product or service can affect consumer decisions to reverse an initial product purchase or service enrollment decision. One belief commonly held by retailers is that provision of greater amounts of information before the purchase reduces decision reversals. We provide theory and evidence showing conditions under which uncertainty-reducing information provided before the purchase decision can actually increase the number of decision reversals. Predictions generated from an analytical model of consumer behavior incorporating behavioral theory of reference-dependence are complemented by empirical evidence from both a controlled behavioral experiment and econometric analysis of archival data. Combined, the theory and evidence suggest that managers should be aware that their information provision decisions taken to reduce decision reversals may actually increase them. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mksc.2015.0906 .

Managing Product Returns Within the Customer Value Framework

Peer-to-peer (P2P) marketplaces, such as Uber, Airbnb, and Lending Club, have experienced massive growth in recent years. They now constitute a significant portion of the worlds economy and provide opportunities for people to transact directly with one another. However, such growth also challenges participants to cope with information asymmetry about the quality of the offerings in the marketplace. By conducting an analysis of a P2P lending market, the authors propose and test a theory in which countersignaling provides a mechanism to attenuate information asymmetry about financial products (loans) offered on the platform. Data from a P2P lending website reveal significant, nonmonotonic relationships among the transmission of nonverifiable information, loan funding, and ex post loan quality, consistent with the proposed theory. The results provide insights for platform owners who seek to manage the level of information asymmetry in their P2P environments to create more balanced marketplaces, as well as for P2P participants interested in improving their ability to process information about the goods and services they seek to transact online.

The Effects of Autoscaling in Cloud Computing

Customers can create value to the firm by purchasing products, not returning these products, recommending products to other potential customers, influencing other customers, and providing feedback to the company. In this chapter, we first discuss how product returns and engagement behaviors can be included in the customer value framework. Second, we discuss the antecedents of a customer’s product return decision, namely, return policies, information at the moment of purchase, and customer and product characteristics. Third, we focus on the consequences of product returns: the effects on future purchase and product return behavior, as well as on customer engagement behaviors. Thus, this chapter provides a comprehensive synthesis of current knowledge on antecedents and consequences of product returns and how this relates to measuring and managing customer value.

Implications of Market Spillovers

Web-based firms often rely on cloud-based computational resources to serve customers, but the number of customers they will serve is rarely known at the time of product launch. A recent innovation in cloud computing, known as autoscaling, allows companies to automatically scale their computational load up or down to match customer demand. We build a game theory model to examine how autoscaling will affect firms’ decisions to enter a new market and the resulting equilibrium prices, profitability, and consumer surplus. The model produces novel results depending on the likelihood of a firm’s success in the new market, differentiation among potential entrants, and the cost of computational capacity. For instance, in contrast to previous capacity commitment models with demand certainty, we show that autoscaling can mitigate price competition if the likelihood of a firm’s success in the market is moderate and the cost of capacity is sufficiently low. This is because without autoscaling, the firms’ uncertainty a...

Strategic compliments in sales

In recent years, several firms have decided to withdraw from profitable markets, believing the move will be beneficial for their overall business. For instance, CVS dropped tobacco products from its shelves in 2014, while Aldi dropped confectionery from its checkout lines in 2016. Findings from consumers’ evaluation of such moves suggest there exists a negative market spillover from selling in a market, such that a firm’s participation in one market reduces consumers’ willingness to pay for the firm’s products in other markets. On the other hand, certain socially favorable markets, such as markets for environment-friendly products, have been shown to create a positive market spillover for their sellers, increasing consumers’ willingness to pay in other markets the sellers participate in. We build an analytical model of two competing firms to examine how firms react to a market spillover and find the conditions under which different firms would sell in the spillover-producing market. Our analysis of how fi...