Pedro M. Gardete

Cheap-Talk Advertising and Misrepresentation in Vertically Differentiated Markets

I consider a cheap-talk model in which a firm has a chance to communicate its product quality to consumers. The model describes how advertising can be both informative to consumers and profitable for the firm through its content in a vertically differentiated market. I find that advertising content may be effective in inducing search even if incentives for misrepresentation exist. In particular, a firm with an undesirable low-quality product is able to attract consumers who would have not incurred a search cost had they known its true quality. In this case, a semiseparating equilibrium occurs where the lowest firm types pool upward in order to increase the expected product quality while simultaneously signaling that the product is affordable. Although consumers always benefit from truth in advertising, total welfare may decrease if an undesirable firm is required to reveal its type. Finally, I show that the extent to which misrepresentation can take place increases with the cost of advertising coverage.

Social Effects in the In-Flight Marketplace: Characterization and Managerial Implications

This article investigates the in-flight marketplace, using detailed data of in-flight purchases to understand social effects in purchase behavior and determine their potential for designing marketing promotions. On average, a passenger is approximately 30% more likely to buy an item after being exposed to a lateral purchase. Analyses on the underlying mechanisms reveal that the classical social influence theories do not suffice to explain all the patterns in the data. The author proposes omission neglect, product contagion, and goal balancing as complementary theories. Finally, consumers’ willingness to buy is shown to be positively correlated with responsiveness to social influence. This finding indicates that homophily and social feedback effects—classically viewed in the literature as nuisances—can provide targeting value for the firm. By taking these factors into account during behavior-based targeting, firms can double the social spillovers of marketing actions.

Tailored Cheap Talk

We consider a cheap-talk game in which the persuader is able to collect information about the receivers preferences in order to tailor communication and induce a favorable action. We find that the sender prefers not to learn the receivers preferences with certainty, but to remain in a state of partial willful ignorance. The receiver prefers complete privacy except when information is necessary to induce communication from the sender. Surprisingly, joint welfare is always maximized by the senders first-best level of information acquisition. The implications of our results are discussed in the contexts of online advertising, sales, dating and job search.

Competing Under Asymmetric Information: The Case of Dynamic Random Access Memory Manufacturing

Much like in other semiconductor environments, dynamic random access memory (DRAM) manufacturers face significant demand uncertainty before production and capacity decisions can be implemented. This paper investigates the role of market information in DRAM manufacturing and the consequences of allowing information sharing in the industry. An oligopoly model of competition with correlated private information is developed in which firms make decisions about production and capacity. In this setting, firms consider the information their competitors are likely to hold, conditional on their own. We find that both firms and customers benefit when firms share information with their competitors. In particular, sharing information is profitable because market price decreases slowly with overproduction. When combined with the results from the information sharing literature, this paper highlights the need to assess information sharing policies on a case-by-case basis. This paper was accepted by Matthew Shum, marketing.

Coalition Loyalty Program Not Working? Perhaps You’re Doing It Wrong

In this paper we explore the determinants of profitability for coalition loyalty programs. We consider a setting in which each of two firms competing in one market may form a coalition loyalty program with one of two firms in a different market. Firms in the same program jointly set the reward to consumers who buy from both coalition partners, but they set their own prices independently. We find that these programs are profitable for all firms, even when no value is created by the mere existence of rewards (i.e., when firms and consumers value

Tailored Cheap Talk: The Effects of Privacy Policy On Ad Content and Market Outcomes

1 worth of rewards equally). The intuition is that joint loyalty programs allow each participating firm to leverage its partner’s market power and charge higher prices. This result, however, depends crucially on several design elements of the program. First, rewards must be structured so that consumers earn more when they shop broadly across firms in the coalition than when they shop at only a single firm. Second, the reward program manager must be able to take into account the prices of individual firms when setting the value of rewards. Third, firms joining a coalition must be able to negotiate the share of program costs they will carry; firms must be charged according to their value added to the coalition (e.g., firms with greater market power will bear a lower share of program costs) and not taxed as a proportion of their revenues. Our theoretical findings provide insight into the forces underlying coalition loyalty programs in competitive settings and are suggestive of the impact of practical design decisions on program profitability.

Dynamic Effects of Price Promotions: Field Evidence, Consumer Search, and Supply-Side Implications

We analyze persuasion settings in which the seller holds information abosut the customer’s preferences that can be used to tailor communication.

Multiplicity of equilibria and information structures in empirical games: challenges and prospects

This paper investigates the dynamic effects of price promotions in a retail setting through the use of a large-scale field experiment which involved varying the promotion depths of 170 products across 17 categories in 10 supermarkets of a major retailer in Chile. In the intervention phase of the experiment, customers were exposed to a promotion schedule that differed only on promotional depths: treated customers were exposed to deep discounts (approximately 30%), whereas control customers were exposed to shallow discounts (approximately 10%). In the subsequent measurement phase, the promotion schedule held discount levels constant across groups. We find that treated customers were 22.4% more likely to buy promoted items than their control counterparts, despite facing the same promotional deals. Strikingly, the magnitude of the dynamic effects of price promotions (when promotional depths are equal across conditions) is 61% of the promotional effects induced by offering shallow vs. deep discounts during the intervention phase. The result is robust to other concurrent dynamic forces, including consumer stockpiling behavior and state dependence. We use the experimental variation and historical promotional activities to inform a demand-side model in which consumers search for deals, and a supply-side model in which firms compete for those consumers. We find that small manufacturers can benefit from heightened promotion sensitivity by using promotions to induce future consideration. However, when unit margins are high, heightened promotion sensitivity leads to fierce competition, making all firms worse off.