Praveen K. Kopalle

Dynamic Pricing on the Internet: Importance and Implications for Consumer Behavior

The pricing of products and services sold over the Internet channel is becoming more dynamic. In part this is due to the increasing use of auction models in business and consumer markets to sell commodities, excess inventories, used merchandise, rare items collectibles, and other items. Marketers are resorting to dynamic prices even for goods and services sold at posted prices, spurred partly by the lower menu cost of changing prices on the Internet and partly as a response to consumer use of price-comparison bots. This paper explains the relevance of dynamic pricing in the digital economy by comparing the physical value chain with the virtual-information-based value chain. It explores the implications of certain aspects of dynamic pricing in consumer markets (e.g., dynamic pricing of posted prices, reverse auction pricing of goods and services as used by Priceline) from the perspective of consumer price expectations, the role of information and consumer learning, and their impact on consumer responses to prices across different product categories. Several propositions are developed, and issues for research are identified.The pricing of products and services sold over the Internet channel is becoming more dynamic. In part this is due to the increasing use of auction models in business and consumer markets to sell commodities, excess inventories, used merchandise, rare items collectibles, and other items. Marketers are resorting to dynamic prices even for goods and services sold at posted prices, spurred partly by the lower menu cost of changing prices on the Internet and partly as a response to consumer use of price-comparison bots. This paper explains the relevance of dynamic pricing in the digital economy by comparing the physical value chain with the virtual-information-based value chain. It explores the implications of certain aspects of dynamic pricing in consumer markets (e.g., dynamic pricing of posted prices, reverse auction pricing of goods and services as used by Priceline) from the perspective of consumer price expectations, the role of information and consumer learning, and their impact on consumer responses to prices across different product categories. Several propositions are developed, and issues for research are identified.

Strategic Management of Expectations: The Role of Disconfirmation Sensitivity and Perfectionism

The authors suggest that people strategically manage—specifically, lower—their expectations to increase future satisfaction. Consumers who are more disconfirmation sensitive, that is, those who are more satisfied (dissatisfied) when a product performs better (worse) than expected, are hypothesized to have lower expectations. In contrast, the authors expect that consumers who are perfectionists will have higher expectations than those who are not. Results from a laboratory experiment and a field study are consistent with the hypotheses. Furthermore, the authors identify a possible third type of expectation (“as-if”) that serves as a basis for post-purchase evaluation and provide preliminary evidence that it differs from both will and should expectations.

The impact of collinearity on regression analysis: the asymmetric effect of negative and positive correlations

The purpose of this paper is to ascertain how collinearity in general, and the sign of correlations in specific, affect parameter inference, variable omission bias, and their diagnostic indices in regression. It is found that collinearity can reduce parameter variance estimates and that positive and negative correlation structures have an asymmetric effect on variable omission bias. It is also shown that the effects of collinearity are moderated by the relationship between the dependent variable and the regressors, a consideration not incorporated into most commonly used collinearity diagnostics. The formulae derived enable researchers to assess the sensitivity of regression results to the underlying correlation structure in the data.

The"Right" Consumers for Better Concepts: Identifying Consumers High in Emergent Nature to Develop New Product Concepts

While much research has emphasized improving current new product concept techniques, little work has focused on trait-based approaches that specify which consumers are the “right” ones to use in the new product development process, particularly in the consumer goods industry. The authors propose that the right consumers to use possess what they call an “emergent nature,” defined as the unique capability to imagine or envision how concepts might be developed so that they will be successful in the mainstream marketplace. The authors draw on research on personality theory and information-processing styles to support their conceptualization and develop and validate a highly reliable scale to measure emergent nature (Study 1). In subsequent multipart studies, they show in both group (Studies 2a–2c) and individual (Studies 3a and 3b) settings across two distinct product categories that consumers high in emergent nature are able to develop product concepts that mainstream consumers find significantly more appealing and useful than concepts developed by typical, lead user, or even innovative consumers.

A Dynamic Model of Reference Price and Expected Quality

A number of recent papers have developed normative implications of the concept of reference price. In this paper, we extend that literature to incorporate the relationship between expected quality and reference price. We consider the case of a monopolist who makes time-varying decisions regarding price and product quality. Our results suggest that when the effect of a loss (price greater than reference price and product quality less than expected quality) on demand is greater than or equal to that of a corresponding gain, it is optimal for a monopolist to have constant price and product quality levels. When the effect of a gain on demand is greater than that of a corresponding loss, however, we find that it is optimal to maintain cyclical pricing and product quality policies.

The role of market expansion on equilibrium bundling strategies

Research on optimal bundling strategy has primarily dealt with the case of a monopolist and suggests that mixed bundling be adopted, as it allows for price discrimination. The overwhelming majority of consumer products, however, operate in a competitive arena, so that an adequate description of the bundling phenomenon needs to take account of alternative competitive product offerings. A few researchers have examined the duopolistic case-two suppliers each offering a bundle composed of two complementary products. However, the collective results do not paint a consistent picture. For example, Economides (1993. Mixed bundling in duopoly. Working Paper, Stern School of Business, New York University, EC-93-29) shows that the sub-game perfect Nash equilibrium bundling strategy is to offer a mixed bundle. By contrast, Anderson and Leruth (1993. Why firms may prefer not to price discriminate via mixed bundling. International Journal of Industrial Organization 11 : 49-61), show that the solution is to offer pure components. The results of Matutes and Regibeau (1992. Compatibility and bundling of complementary goods in a duopoly. Journal of Industrial Economics 40 : 37-54) suggest that the bundling strategy depends on consumer reservation price: mixed bundling when it is low and pure components when it is high. This paper offers an analytical analysis that reconciles these results by incorporating the moderating role of market expansion on equilibrium bundling strategies. Rendering comparable the conflicting results of such prior research requires selecting a methodology that not only sufficiently allows for their unique formal specifications, but which, in the current estimate, best captures empirical phenomena of broadest interest. The focus on market expansion suggests a model of the nested logit type (see Bucklin and Gupta 1992. Brand choice, purchase incidence, and segmentation: an integrated approach. Journal of Marketing Research 29 : 201-215). It is shown that the sub-game perfect Nash equilibrium bundling strategy in a duopoly depends on the scope for market expansion, i.e., as the scope for market expansion decreases, the equilibrium bundling strategy shifts from mixed bundling to pure components. It is also shown that pure bundling will not be an equilibrium strategy. Finally, a discussion of the results when the assumption of perfect complementarity is relaxed is provided. Copyright

The Effects of Advertised Quality Emphasis and Objective Quality on Sales

Given that consumers value quality, and advertising content informs consumers’ beliefs about quality, it is not surprising that high-quality brands emphasize quality in their advertising content. What is less obvious is whether firms with lower-quality brands should also follow suit and emphasize quality in their advertising to signal a higher quality. We examine this issue and study the effectiveness of quality-based advertising messages. Our field study relates brands’ monthly sales to their advertised quality claims across 1,876 print ads in national magazines and Consumer Reports–based product quality ratings over more than two decades. Contrary to the generally held yet erroneous belief in the efficacy of low-quality products emphasizing quality in their advertising, we demonstrate that (1) it is not beneficial for a low-quality firm to emphasize quality in its advertising, and (2) it is effective for a high-quality firm to do so. An analysis of parameter values from a published category-agnostic simulation and an experiment that examines consumers’ responses to quality claims in a second product category yields convergent insights.

A numerical approach to solve finite horizon optimal control problems

The authors present a two state optimal control problem which exhibits the turnpike property. They provide an example of a dynamical system in a marketing context, numerical simulations of which showed that it exhibits the turnpike property. The problems encountered are discussed while numerically solving a dynamical system with more than one state variable and which displays the turnpike property. A numerical approach is described to solve the problem in a finite horizon using Fortran NAg library routines.<<ETX>>

Why the Dynamics of Competition Matter for Category Profitability

Category management (CM) has become a widespread trade practice in recent years. A category managers decision problem is complex and multifaceted owing to demand dependencies across products and across time. Extant research on CM has typically focused on one or the other of these dependencies, but seldom both. The authors address this research gap by presenting a competition framework that reconciles cross-sectional breadth (large numbers of stockkeeping units in any given period) with longitudinal depth (demand effects across time). The endeavor is to offer retailers a general, realistic, and practical CM approach by comprehensively accounting for competitive effects. The authors demonstrate their approach using real-world data in the beer category for a midsize grocery chain in the northeastern United States. After determining the optimal weekly prices for the entire assortment over 23 weeks, the authors report a profit yield that is 3.30% more than in the benchmark logit model and substantially more than in the retailers current everyday low price policy.