Jiwoong Shin

Uninformative Advertising as an Invitation to Search

What the firm should say in an advertising message, the choice of content, is a critical managerial decision. Here, we focus on a particular aspect of the advertising content choice: an attribute-focused appeal versus an appeal with no direct information on product attributes. We make two assumptions that capture the reality of the advertising context. First, we assume that the bandwidth of advertising is limited: a firm can only communicate about a limited number of attributes. Second, we assume that consumers are active: they can choose to engage in a costly search to obtain additional product-related information. In this setting, we show that there exists an equilibrium where the high-quality firm chooses to produce messages devoid of any attribute information in order to invite the consumer to engage in search, which is likely to uncover positive information about the product. Whereas most of the previous literature has focused on the decision to advertise as a signal of quality, we show that message content, coupled with consumer search, can also serve as a credible signal of quality. In an extension, we show that our results are robust to endogenizing the firms decision on the amount of advertising spending.

When to “Fire” Customers: Customer Cost-Based Pricing

The widespread adoption of activity-based costing enables firms to allocate common service costs to each customer, allowing for precise measurement of both the cost to serve a particular customer and the customers profitability. In this paper, we investigate how pricing strategies based on customer cost information affects a firms customer acquisition and retention dynamics, and ultimately its profit, using a two-period monopoly model with high-and low-cost customer segments. Although past purchase and cost information helps firms to increase profits through differential prices for good and bad customers in the second period (“price discrimination effect”), it can hurt firms because strategic forward-looking consumers may delay purchases to avoid higher future prices (“ratchet effect”). We find that when the customer cost heterogeneity is sufficiently large, it is optimal for firms to “fire” some of its high-cost customers, and customer cost-based pricing is profitable. Surprisingly, it is optimal to fire even some profitable customers. This result is robust even when the cost to serve is endogenous and determined by the consumers choice of service level. We also shed insight on acquisition--retention dynamics, on when firms can improve their profitability by selectively firing known old “bad” customers, and on replacing the old “bad” customers with a mix of new “good” and “bad” customers. This paper was accepted by J. Miguel Villas-Boas, marketing.

Incentive Problems in Performance-Based Online Advertising Pricing: Cost per Click vs. Cost per Action

The multibillion-dollar online advertising industry continues to debate whether to use the cost per click (CPC) or cost per action (CPA) pricing model as an industry standard. This paper applies the economic framework of incentive contracts to study how these pricing models can lead to risk sharing between the publisher and the advertiser and incentivize them to make efforts that improve the performance of online ads. We find that, compared with the CPC model, the CPA model can better incentivize the publisher to make efforts that can improve the purchase rate. However, the CPA model can cause an adverse selection problem: the winning advertiser tends to have a lower profit margin under the CPA model than under the CPC model. We identify the conditions under which the CPA model leads to higher publisher (or advertiser) payoffs than the CPC model. Whether publishers (or advertisers) prefer the CPA model over the CPC model depends on the advertisers’ risk aversion, uncertainty in the product market, and the...

Commentaries and Rejoinder to "Do Switching Costs Make Markets Less Competitive?"

Vol. XLVI (August 2009), 446–452 446

Pricing of Online Advertising: Cost-Per-Click-Through Vs. Cost-Per-Action

Todays online advertising contracts tie online advertising payments directly to campaign measurement data such as click-throughs and purchases. This paper applies the economic theory of incentive contracts to the study of these pricing models and provides potential explanations as to when and how CPC (cost-per-click-through) and CPA (cost-per-action) pricing models should be used. We argue that using CPC and CPA models appropriately can give both the publisher and the advertiser proper incentives to make non-contractible efforts that may improve the effectiveness of advertising campaigns. It also allows the publisher and the advertiser to share the risk caused by uncertainty in the product market. Our research discovers various factors that can influence the usage of CPC and CPA models.

A Model of Two-Sided Costly Communication for Building New Product Category Demand

When a firm introduces a radical innovation, consumers are unaware of the product’s uses and benefits. Moreover, consumers are unsure of whether they even need the product. In this situation, we co...

Demand Externalities from Co-Location

We illustrate an approach to measure demand externalities from co-location by estimating household level changes in grocery spending at a supermarket among households that also buy gas at a co-located gas station, relative to those who do not. Controlling for observable and unobserved selection in the use of gas station, we find significant demand externalities; on average a household that buys gas has 7.7% to 9.3% increase in spending on groceries. Accounting for differences in gross margins, the profit from the grocery spillovers is 130% to 150% the profit from gasoline sales. The spillovers are moderated by store loyalty, with the gas station serving to cement the loyalty of store-loyal households. The grocery spillover effects are significant for traditional grocery products, but 23% larger for convenience stores. Thus co-location of a new category impacts both inter-format competition with respect to convenience stores (selling the new category) and intra-format competition with respect to other supermarkets (selling the existing categories).