Kanishka Misra

Channel Pass-Through of Trade Promotions

Packaged goods manufacturers spend in excess of

Ideology and Brand Consumption

75 billion annually on trade promotions, even though their effectiveness has been hotly debated by academics and practitioners for decades. One reason for this ongoing debate is that empirical research has been limited mostly to case studies, managerial surveys, and data from one or two supermarket chains in a single market. In this paper, we assemble a unique data set containing information on prices, quantities, and promotions throughout the entire channel in a category. Our study extends the empirical literature on pass-through in three important ways. First, we investigate how pass-through varies across more than 1,000 retailers in over 30 states. Second, we study pass-through at multiple levels of the distribution channel. Third, we show how the use of accounting metrics, such as average acquisition cost, rather than transaction cost, yields biased estimates of pass-through and therefore overstates the effectiveness of trade promotions. We find that mean pass-through elasticities are 0.71, 0.59, and 0.41, for the wholesaler, retailer, and total channel, respectively. More importantly, at each level of the channel we observe large variances in pass-through estimates that we explain using various measures of cost and competition. Surprisingly, we find that market structure and competition have a relatively small impact on pass-through. We conclude by showing how the profitability of manufacturer and wholesaler deals can be improved by utilizing detailed effectiveness estimates. For example, a manufacturer using an inclusive trade promotion strategy might offer a 10% off invoice deal to all retailers on every product. This strategy would decrease manufacturer and wholesaler profits for 56% of product/store combinations, whereas retailers experience a profit boost in 96% of cases. Manufacturers and wholesalers can avoid unprofitable trade deals for specific products and retailers by utilizing estimates of pass-through, consumer price elasticity, and margins. Compared to the inclusive strategy, such a selective trade promotion strategy would improve deal profitability by 80% and reduce costs by 40%.

Outsourcing Retail Pricing to a Category Captain: The Role of Information Firewalls

Do mundane daily choices, such as what brands people buy in a supermarket, reflect aspects of values and ideologies? This article presents a large-scale field study performed to determine whether traits associated with a conservative ideology, as measured by voting behavior and religiosity, are manifested in consumers’ routine, seemingly inconsequential product choices. Our analysis of market shares for a variety of frequently purchased products shows that both of these measures of conservatism are associated with a systematic preference for established national brands (as opposed to their generic substitutes) and with a lower propensity to buy newly launched products. These tendencies correspond with other psychological traits associated with a conservative ideology, such as preference for tradition and the status quo, avoidance of ambiguity and uncertainty, and skepticism about new experiences.

Robust Firm Pricing with Panel Data

It has been argued that retailers lack both the resources and capabilities to maximize category performance. Retailers may seek category management CM advice from a manufacturer, referred to as a category captain CC. A CCs recommendations affect all brands in the category, not just her own. Despite an increase in the number of CC collaborations, retailers are still concerned about manufacturer opportunism and militant behavior by manufacturers not selected as CCs, whereas government agencies are worried about anticompetitive behavior that could harm consumers. The Federal Trade Commission recommends strictly enforced information firewalls within a CCs organization as a best-practice guideline. In this study we develop an empirical model and use policy simulations to quantify the impact of CC arrangements with information firewalls on retailers, manufacturers, and consumers. We show how these effects could be influenced by the deactivation of vertical and horizontal information firewalls within the CCs organization.

Fee or Free: When Should Firms Charge for Online Content?

Firms often have imperfect information about demand for their products. We develop an integrated econometric and theoretical framework to model firm demand assessment and subsequent pricing decisions with limited information. We introduce a panel data discrete choice model whose realistic assumptions about consumer behavior deliver partially identified preferences and thus generate ambiguity in the firm pricing problem. We use the minimax-regret criterion as a decision-making rule for firms facing this ambiguity. We illustrate the framework’s benefits relative to the most common discrete choice analysis approach through simulations and empirical examples with field data.

Robust New Product Pricing

Many online content providers aim to compensate for a loss in advertising revenues by charging consumers for access to content. However, such a choice is not straightforward because subscription fees typically deter customers, and a resulting decline in viewership further reduces advertising revenues. This research examines whether firms that offer both free and paid content can benefit from adjusting the amount of content offered for free. We find that firms should offer more free—and not paid—content in periods of high demand. We motivate theoretically that this policy, which we term “countercyclical offering,” may be optimal for firms when consumers are heterogeneous in their valuation of online content and this heterogeneity varies over time. Using unique data from an online content provider, we then provide empirical evidence that firms indeed engage in countercyclical offering and increase the share of free content in periods of high demand. This paper was accepted by Matthew Shum, marketing.Many online content providers aim to compensate for a loss in advertising revenues by charging consumers for access to online content. However, such a choice is not straightforward, because subscription fees typically deter customers, further reducing advertising revenues. In this research, we empirically examine and quantify a content provider’s trade-off between advertising and subscription revenues. We build a unique data set from the sports’ website ESPN.com, which offers the majority of content for free but charges a membership fee for a subset of articles. We collect data on the number of free and paid articles per day and sport, as well as demand for each type of article per day and sport over a 13-month period. We estimate how the number of free and paid articles affects viewership of the site, and empirically quantify a firm’s trade-off between advertising and subscription revenues, controlling for a wide range of possible demand shifters. We find that, on average, the firm should not adjust the amount of paid content. However, our results show strong differences across sports’ seasons: the marginal paid article increases revenue in the off-season but decreases revenue in the regular season. This finding implies the firm can increase revenue by flexibly adjusting the amount of paid content it offers across sports’ seasons. More generally, our results suggest that online content providers should carefully identify temporal variation in demand, and over time adjust the amount of paid content they offer rather than setting a static paywall.

Will a Fat Tax Work

We study the pricing decision for a monopolist launching a new innovation. At the time of launch, we assume that the monopolist has incomplete information about the true demand curve. Despite the lack of objective information the firm must set a retail price to maximize total profits. To model this environment, we develop a novel two-period non-Bayesian framework where the monopolist sets the price in each period based only on a nonparametric set of all feasible demand curves . Optimal prices are dynamic as prices in any period allow the firm to learn about demand and improve future pricing decisions. Our main results show that the direction of dynamic introductory prices (versus static prices) depends on the type of heterogeneity in the market. We find that (1) when consumers have homogeneous preferences, introductory dynamic price is higher than the static price; (2) when consumers have heterogeneous preferences and the monopolist has no ex ante information, the introductory dynamic price is the same as the static price; and (3) when consumers have heterogeneous preferences and the monopolist has ex ante information, the introductory dynamic price is lower than the static price. Furthermore, the degree of this initial reduction increases with the amount of heterogeneity in the ex ante information.

The Perils of Category Management: The Effect of Product Assortment on Multicategory Purchase Incidence

Of the many proposals to reverse the obesity epidemic, the most contentious is the use of price-based interventions such as the fat tax. Previous investigations of the efficacy of such initiatives in altering consumption behavior yielded contradictory findings. In this article, we use six years of point-of-sale scanner data for milk from a sample of over 1,700 supermarkets across the United States to investigate the potential of small price incentives for inducing substitution of healthier alternatives. We exploit a pricing pattern particular to milk in the United States, whereby prices in some geographical regions are flat across whole, 2%, 1%, and skim milk; whereas in other regions they are decreasing with the fat content level. The prevailing price structure is determined at a chain and regional level, and is independent of local demand conditions. This exogenous variation in price structure provides a quasi-experimental set-up to analyze the impact of small price differences on substitution across fat content. We use detailed demographics to evaluate price sensitivity and substitution patterns for different socioeconomic groups. Results show that small price differences are highly effective in inducing substitution to lower calorie options. The impact is highest for low-income households who are also most at risk for obesity. Our results suggest that a selective taxation mechanism that lowers the relative prices of healthier options, such that those price changes are reflected in shelf prices at the point-of-purchase, can serve as an effective health policy tool in the efforts to control obesity.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mksc.2015.0917 . Press Release

Consumption, Income Changes, and Heterogeneity: Evidence from Two Fiscal Stimulus Programs

Retailers determine the assortment for a mix of product categories in a particular space (e.g., the checkout aisle, endcaps, freezer space). Within such a “target” space, shoppers are exposed to a selection of product categories that are not necessarily correlated in consumption. In this article, the authors examine whether the assortment of one category affects consumers’ purchase incidence decision in another, independent category that shares a common display space (e.g., frozen meals and ice cream). They use a multivariate probit model of purchase incidence and incorporate assortment variety captured by an entropy measure. Results from analyses of IRI data and an online experiment provide strong evidence that consumers are less likely to purchase from a category of a given assortment when it is presented with another category assortment of greater variety and that this effect is driven by the display proximity. Furthermore, results from an eye-tracking study indicate consumers’ allocation of limited attention to category assortments as an explanation for the finding. This work serves as one of the first studies to document the impact of product assortment beyond a focal category, and the results highlight a limitation of individual category management when grocery retailers make product assortment decisions.