Mengze Shi

A Bargaining Model for a First-Time Interaction Under Asymmetric Beliefs of Supply Reliability

We consider the case of a first-time interaction between a buyer and a supplier who is unreliable in delivery. The supplier declares her estimate of the ability to meet the order obligations, but the buyer may have a different estimate, which may be higher or lower than the suppliers estimate. We derive the Nash bargaining solution and discuss the role of using a down-payment or nondelivery penalty in the contract. For the case of buyer overtrust, the down-payment contract maximizes channel profits when the suppliers estimate is public information. If the suppliers estimate is private information, a nonsymmetric contract is shown to be efficient and incentive compatible. For the case of buyer undertrust, the contract structure is quite different as both players choose not to include down-payments in the contract. When delivery estimates are public information, a nondelivery penalty contract is able to maximize channel profits if the buyer uses the suppliers estimate in making the ordering decision. If estimates are private information, channel profits are maximized only if the true estimates of both players are not far part. We also discuss the effect of different risk profiles on the nature of the bargaining solution. In three extensions of the model, we consider the following variants of the basic problem. First, we analyze the effect of early versus late negotiation on the bargaining solution. Then, we study the case of endogenous supply reliability, and finally, for the case of repeated interactions, we discuss the impact of updating delivery estimates on the order quantity and negotiated prices of future orders.

MAILING SMARTER TO CATALOG CUSTOMERS

Abstract A major issue that dominates the current thinking of catalogers is how to send mail more efficiently in order to increase response rates and decrease wasteful mailing activity. Currently cataloguers assume that a mailing decision should be made when expected profit (or lifetime value) is positive or at best when expected profit exceeds a certain threshold. We offer a new perspective. We suggest that a customer be sent the current catalog only if the expected profit with the current catalog exceeds the expected profit without the current catalog. We develop, estimate, and test a hazard function model with unobserved heterogeneity to estimate the sensitivity of the customers’ purchase intensity to catalog drop and to other factors. We explicitly allow for customers to order from previous catalogs and control for the effects of promotional rest and wearout. We find that it is better to send (not too many but) a few catalogs with (not too long but) a moderate amount of time between them in order to encourage purchases.

Price Competition with Reduced Consumer Switching Costs: The Case of Wireless Number Portability in the Cellular Phone Industry

Wireless number portability (WNP) is a telecommunication regulatory policy that requires cellular phone service providers to allow customers who switch service subscriptions to retain their original phone numbers. The right to retain the number lowers the switching cost for a consumer. Thus, the purpose of the policy is to induce more competition and facilitate the growth of new or small service providers. In this paper, we show that WNP drives market price downward as expected but with a surprising twistrather than helping the smaller firms grow, the policy may accelerate the process of market concentration. We find that the main contributing factor to this peculiarity is the discriminatory pricing scheme prevalent in the industrythat is, a service provider charges a lower per-minute fee for the calls initiated and received within the same network than for the calls connected across two networks. Under this pricing scheme, a consumer who subscribes to a larger network would benefit more than if subscribing to a smaller network, despite the relatively higher fixed access fee that the former may charge. By lowering the barrier of switching, WNP creates a market condition conducive for a larger network to gain market share. We support our analysis with the empirical evidence gathered from Hong Kong where WNP was adopted in March 1999.

Estimating the Value of Brand Alliances in Professional Team Sports

Brands often form alliances to enhance their brand equities. In this paper, we examine the alliances between professional athletes (athlete brands) and sports teams (team brands) in the National Basketball Association (NBA). Athletes and teams match to maximize the total added value created by the brand alliance. To understand this total value, we estimate a structural two-sided matching model using a maximum score method. Using data on the free-agency contracts signed in the NBA during the four-year period from 1994 to 1997, we find that both older players and players with higher performance are more likely to match with teams with more wins. However, controlling for performance, we find that brand alliances between high brand equity players (defined as receiving enough votes to be an all-star starter) and medium brand equity teams (defined by stadium and broadcast revenues) generate the highest value. This suggests that top brands are not necessarily best off matching with other top brands. We also provide suggestive evidence that the maximum salary policy implemented in 1998 influenced matches based on brand equity spillovers more than matches based on performance complementarities.

Virtual Progress: The Effect of Path Characteristics on Perceptions of Progress and Choice

In goal-oriented services, consumers want to get transported from one well-defined state (start) to another (destination) state without much concern for intermediate states. A cost-based evaluation of such services should depend on the total cost associated with the service--i.e., the price and the amount of time taken for completion. In this paper, we demonstrate that the characteristics of the path to the final destination also influence evaluation and choice. Specifically, we show that segments of idle time and travel away from the final destination are seen as obstacles in the progress towards the destination, and hence lower the choice likelihood of the path. Further, we show that the earlier such obstacles occur during the service, the lower is the choice likelihood. We present an analytical model of consumer choice and test its predictions in a series of experiments. Our results show that in choosing between two services that cover the same displacement in the same time (i.e., identical average progress), consumer choice is driven by the perception of progress towards the goal (i.e., byvirtual progress). In a final experiment, we show that the effects of virtual progress may outweigh the effects of actual average progress.

Simultaneous vs. Sequential Group-Buying Mechanisms

This paper studies the design of group-buying mechanisms in a two-period game where cohorts of consumers arrive at a deal and make sign-up decisions sequentially. A firm can adopt either a sequential mechanism where the firm discloses to second-period arrivals the number of sign-ups accumulated in the first period, or a simultaneous mechanism where the firm does not post the number of first-period sign-ups and hence each cohort of consumers faces uncertainty about another cohorts size and valuations when making sign-up decisions. Our analysis shows that, compared with the simultaneous mechanism, the sequential mechanism leads to higher deal success rates and larger expected consumer surpluses. This result holds for a multiperiod extension and when the firm offers a price discount schedule with multiple breakpoints. Finally, when the firm can manage the sequence of arrivals, it should inform the smaller cohort of consumers first. This paper was accepted by J. Miguel Villas-Boas, marketing.

Managing Capacity Through Reward Programs

Rewarding customers with own products or services has become an increasingly popular practice across a spectrum of industries such as airlines, hotels, and telecommunication. In these service industries, firms face demand uncertainty and strict short-term capacity constraint. When the market demand is low, firms hold excess capacities that would lead to intense price competition. In this paper we study the adoption and design of reward programs in the context of capacity management. We demonstrate that it is optimal for firms to offer capacity rewards when the market demand varies from one period to the other. By offering the reward programs, firms can effectively reduce available capacities when the market demand is low, and hence credibly show their unwillingness to undersell. Such a commitment can encourage their competitors to set their prices high. When firms provide reward programs, if a firm sets a higher price than the other and sells less today, in the future the firm can benefit from the other firms larger reduction in available capacity through rewards. Thus, reward programs also provide additional incentives for firms to set higher current prices. Finally, since reward programs can add flexibility in adjusting the available capacities to the market demand, firms increase the size of regular capacities with reward programs.

Product and Pricing Decisions in Crowdfunding

This paper studies the optimal product and pricing decisions in a crowdfunding mechanism by which a project between a creator and many buyers will be realized only if the total funds committed by the buyers reach a specified goal. When the buyers are sufficiently heterogeneous in their product valuations, the creator should offer a line of products with different levels of product quality. Compared to the traditional situation where orders are placed and fulfilled individually, with the crowdfunding mechanism, a product line is more likely than a single product to be optimal and the quality gap between products is smaller. This paper also shows the effect of the crowdfunding mechanism on pricing dynamics over time. Together, these results underscore the substantial influence of the emerging crowdfunding mechanisms on common marketing decisions.

Consumer Value-Maximizing Sweepstakes and Contests

Sweepstakes and contests are some of the most frequently used promotional tools. Consumers participating in sweepstakes or contests have an opportunity to win prizes through a random draw. The authors examine how commonly used sweepstakes formats that vary in the number of winners and the allocation of the total reward money among the winners affect consumer valuations of the promotion. Given a fixed amount of reward money, the authors examine alternative reward formats based on the promotional objectives, consumer risk aversion, and degree of subadditivity. They test the analytical results using an experimental approach.

When Gray Markets Have Silver Linings: All-Unit Discounts, Gray Markets, and Channel Management

Gray markets are unauthorized channels of distribution for a suppliers authentic products. We study a distribution channel that consists of a supplier who offers all-unit quantity discounts for batch orders to enjoy cost savings, and a reseller who may divert some goods to the gray markets. We show that the impact of gray markets depends on the resellers inventory holding cost. When the resellers inventory holding cost is high, diversion to the gray markets improves the channel performance by enabling the reseller to make batch orders. Because the resellers order costs decrease through quantity discounts, diversion to the gray markets reduces the resale price and expands sales to the authorized channel. On the other hand, when the resellers inventory holding cost is low, the reseller would make the batch orders even without the gray markets. In this case the diversion to the gray markets may improve the resellers performance by shortening the order cycles and reducing the inventory holding costs. Interestingly, because diversion to the gray markets decreases the resellers cycle inventory volume, the reseller has the reduced incentive to push its inventory, and, consequently, the resale price rises and sales volume decreases in the authorized channel. Moreover, there exists a range of resellers inventory holding cost and suppliers cost of scale economy such that it is optimal for the supplier to induce resellers gray market diversion through an all-unit discount. We show that these results are robust when the gray market overlaps with the authorized channel or when the gray market price is sensitive to resellers diversion volume.