Mohammad Saifur Rahman

Battle of the Retail Channels: How Product Selection and Geography Drive Cross-Channel Competition

A key question for Internet commerce is the nature of competition with traditional brick-and-mortar retailers. Although traditional retailers vastly outsell Internet retailers in most product categories, research on Internet retailing has largely neglected this fundamental dimension of competition. Is cross-channel competition significant, and if so, how and where can Internet retailers win this battle? This paper attempts to answer these questions using a unique combination of data sets. We collect data on local market structures for traditional retailers, and then match these data to a data set on consumer demand via two direct channels: Internet and catalog. Our analyses show that Internet retailers face significant competition from brick-and-mortar retailers when selling mainstream products, but are virtually immune from competition when selling niche products. Furthermore, because the Internet channel sells proportionately more niche products than the catalog channel, the competition between the Internet channel and local stores is less intense than the competition between the catalog channel and local stores. The methods we introduce can be used to analyze cross-channel competition in other product categories, and suggest that managers need to take into account the types of products they sell when assessing competitive strategies.

Product-Oriented Web Technologies and Product Returns: An Exploratory Study

Internet retailers have been making significant investments in Web technologies, such as zoom, alternative photos, and color swatch, that are capable of providing detailed product-oriented information and, thereby, mitigating the lack of “touch and feel,” which, in turn, is expected to lower product returns. However, a clear understanding of the relationship between these technologies and product returns is still lacking. Our study attempts to fill this gap by using several econometric models to explore the said relationship. Our unique and rich data set from a womens clothing company allows us to measure technology usage at the product level for each consumer. The results show that, in this context, zoom usage has a negative coefficient, suggesting that a higher use of the zoom technology is associated with fewer returns. Interestingly, we find that a higher use of alternative photos is associated with more returns and, perhaps more importantly, with lower net sales. Color swatch, on the other hand, does not seem to have any effect on returns. Thus, our findings show that different technologies have different effects on product returns. We provide explanations for these findings based on the extant literature. We also conduct a number of tests to ensure the robustness of the results.

Beating Irrationality: Does Delegating to IT Alleviate the Sunk Cost Effect?

We investigate the impact of delegating decision making to information technology IT on an important human decision bias-the sunk cost effect. To address our research question, we use a unique data set containing actual market transaction data for approximately 7,000 pay-per-bid auctions. In contrast with the laboratory experiments of previous related studies, our research presents the unique advantage of investigating the effects of IT-enabled automated bidding agents on the occurrence of a decision bias in real market transactions. We identify normatively irrational decision scenarios and analyze consumer behavior in these situations. Our findings show that participants with a higher behavioral investment are more likely to violate the assumption of normative economic rationality because of the sunk cost effect. More importantly, we observe that the delegation of auction participation, i.e., actual bidding, to IT significantly reduces the occurrence of the sunk cost effect in subsequent decisions made by the same individual. We can attribute this reduction to the comparably lower behavioral investments incurred by auction participants who delegate their bidding to IT. In particular, by mitigating different contributors of behavioral investments, delegating to IT reduces the likelihood of the occurrence of the sunk cost effect by more than 50%. This paper was accepted by Sandra Slaughter, information systems.

Economic and Policy Implications of Restricted Patch Distribution

In this paper, we study how restricting the availability of patches to legal users impacts the vendor’s profits, market share, software maintenance decisions, and welfare outcomes. Prior work on this topic assumes that the hacker’s effort is independent of the vendor’s decision to release the patch freely or not. Clearly, if the patch is not available to everyone, the hacker finds it easier to exploit the vulnerability in the product and, as a result, is likely to alter his effort. To understand the role of a strategic hacker, we build a game-theoretic model, where the hacker’s decision is endogenous. With this model, we find that the hacker’s effort may, on the one hand, decrease the utility that the vendor can extract from the consumers but, on the other hand, may help differentiate the legal version of the product from the pirated version. A vendor can strategically exploit the hacker’s behavior in its pricing and software maintenance decisions. The endogeneity of the hacker’s actions drives several of our findings that have interesting policy implications. For example, the vendor may increase the price and reduce market share to exploit the differentiation. In such a case, there may be more pirates in the restricted-patch case than when the patch is freely available, a result that runs counter to typical arguments provided for restricting patches. This paper was accepted by Chris Forman, information systems .

Online Intermediary as a Channel for Selling Quality‐Differentiated Services

When deciding whether to utilize an online intermediary in addition to their own distribution channels, quality differentiated service providers face the trade-off between the benefit of extended reach and the threat of increased competition. Using an analytical framework, we analyze when and how service providers may utilize an online intermediary to their advantage in the presence of advance selling (i.e., selling a service at an early date for future consumption). In general, when an online intermediary is used, the competition effect dominates the reach effect and leads to a falling price trend. Interestingly, we find that the negative effect of increased competition on profits, due to intermediary usage, can be reversed by committing to self-imposed participation limits (i.e., selling only a predetermined amount of services through the online intermediary). This ensures that the service provider is better off selling through both its own site and the online intermediary, rather than selling exclusively using either channel.

Using an Online Intermediary as an Additional Channel for Selling Quality Differentiated Services

When deciding whether to utilize an online intermediary in addition to their own distribution channels, quality differentiated service providers face the trade-off between the benefit of extended reach and the threat of increased competition. Using an analytical framework, we analyze when and how service providers may utilize an online intermediary to their advantage in the presence of advance selling (i.e., selling a service at an early date for future consumption). In general, when an online intermediary is used, the competition effect dominates over the reach effect and leads to a falling price over time, which is in line with our empirical observations from the hotel industry. Interestingly, we find that the negative effect of increased competition on profits, due to intermediary usage, can be reversed by committing to self-imposed participation limits (i.e., selling only a predetermined amount of services through the online intermediary). This ensures that the service provider is better off selling through both its own site and the online intermediary, rather than selling exclusively using either channel.

Shared Prosperity (or Lack Thereof) in the Sharing Economy

This paper examines the potential economic spillover effects of a home sharing platform---Airbnb---on the growth of a complimentary local service---restaurants. By circumventing traditional land-use regulation and providing access to underutilized inventory, Airbnb is attracting visitors of a city to vicinities that are not traditional tourist destinations. The novel nature of the home-sharing offering means that visitors are lodging in areas that are not accustomed to tourists and, as such, may not have the underlying infrastructure to fully benefit from their visits. Although visitors generally bring significant spending power, it is ambiguous whether or not the visitors use Airbnb primarily for lodging, thus, not contributing to the adjacent vicinity economy. To evaluate this, we focus on the impact of Airbnb on the restaurant employment growth across vicinities in New York City (NYC). Specifically, we focus on areas in NYC that did not attract a significant tourist volume prior to the home-sharing service. Our results indicate a salient and economically significant positive spillover effect on restaurant job growth in an average NYC locality. A 1% increase in the intensity of Airbnb activity (Airbnb reviews per household) leads to approximately 1.7% restaurant employment growth. We also investigate the role of demographics and market concentration in driving the variation. Notably, restaurants in areas with a relatively high number of White residents disproportionately benefit from the economic spillover of Airbnb activity whereas the impact in their black counterparts is not statistically significant. We validate the underlying mechanism behind the main result by evaluating the impact of Airbnb on Yelp visitor reviews -- areas with increasing Airbnb activity experience a surge in their share of NYC visitor reviews. This result is further validated by evaluating the impact of a unique Airbnb neighborhood level exogenous policy recently implemented in New Orleans.

Where You Live Matters: The Impact of Local Financial Market Competition in Managing Online Peer-To-Peer Loans

In the past decade, peer-to-peer (P2P) lending has been growing rapidly and disrupting the traditional consumer credit market. For prudent policymaking, particularly in judging the ramifications of potential bank mergers and acquisitions (M&As) and informing various traditional bank stakeholders, it is crucial to understand if and how banks are conditioned to respond to the rise of P2P lending. Accordingly, we study whether local market structure drives heterogeneous responses of traditional banks to convert P2P borrowers back to conventional bank loans. We utilize detailed, loan-level data from major P2P lending platforms in the U.S., combined with rich information of local markets, and employ multiple empirical strategies that control for detailed local market characteristics, exploit instrumental variable methods, or explore exogenous shocks to the local market structure. We find that ceteris paribus, a borrower, who resides in a more competitive market, is more likely to pay off her P2P loan early by making a large one-time payment than a borrower from a less competitive market. We provide extensive evidence that banks operating in a more competitive market are more incentivized to respond to P2P lending by converting these “FinTech” (financial technologies) borrowers to conventional bank loans. The results suggest that borrowers from different markets do not benefit equally from P2P lending being a disruptor of the traditional consumer credit market. Our study has implications for P2P lending, other FinTech based markets, and the consumer credit market in general.

Crowd-Driven Competitive Intelligence: Understanding the Relationship between Local Market Structure and Online Rating Distributions

Crowdsourced online mean ratings of local businesses are increasingly being used to infer the market power of a business. An important consideration in making this inference is whether or not two identically rated businesses (e.g., 4-stars) encounter the same local competitive dynamics if they face contrasting local market competition. Stated differently, this requires investigating if the key distributional properties of mean ratings in a market change with competition. To this end, we combine demographic, socioeconomic, and Yelp restaurant review data for 372 isolated markets in the United States. Our empirical estimates demonstrate that an increase in overall competition – measured as total number of businesses in a market – leads to a broader range and to a decrease in the average of a market’s mean rating distribution. The implication is that a larger market has proportionately more lower rated restaurants, whereas higher rated restaurants have relatively fewer comparable substitutes and face less competition in such a market. These effects are particularly pronounced when the analysis is limited to specific cuisine types where vertical differentiation is more natural or when we control for city-specific unobserved heterogeneity. Our findings highlight that practitioners and scholars using online mean ratings of businesses from disparate markets should account for the local market structure to judiciously analyze the relative market power of a business.

Research Note—An Internet-Enabled Move to the Market in Logistics

Logistics outsourcing has increased with the commercialization of the Internet, implying a reduction in the corresponding transaction costs. The Internet—with its universal connectivity and open standards—radically enhanced information technology (IT) capabilities, and we hypothesize this has reduced external transaction costs relatively more than internal governance costs. Using transaction cost theory as a lens, we examine whether the commercialization of the Internet coincided with a move to the market in logistics—one of the most connected industries in the economy. We estimate the relationship between IT and outsourced logistics in a production function based on two data sets from 1987 to 2008. We find that the effects of IT on outsourced logistics have changed in the post-Internet era. After the commercialization of the Internet, an industry’s own IT investment and outsourced logistics became complements, whereas they were not before. It suggests that because of the unique characteristics of the Int...