Preyas S. Desai

Product Differentiation and Commonality in Design: Balancing Revenue and Cost Drivers

Product design decisions substantially affect the cost and revenue drivers. A design configuration with commonality can lower manufacturing cost. However, such a design may hinder the ability to extract price premiums through product differentiation. We explicitly investigate the marketing-manufacturing trade-off and derive analytical implications for three possible design configurations: unique, premium-common, and basic-common. Our model considers two distinct segments of consumers. Some of the implications of our analysis are not readily apparent. For example, when the high-quality component is made common, the average quality of the products offered to the two segments increases. One may infer that with higher average quality, higher prices or higher total revenues might ensue. However, this may not be the case, as detailed in the paper. Finally, our analysis provides a useful framework to develop an index that can rank order components in terms of their attractiveness for commonality.

Efficiency of mutual funds and portfolio performance measurement: A non-parametric approach

Abstract In finance, portfolio performance assessment is an important area of research. The two popular indices of performance are the Jensens alpha and the Sharpe index. However there are a number of shortcomings of the above measures that have been highlighted in the literature. We propose a new measure of performance that seeks to address the limitations of the earlier indices. The new index is calculated by employing a well known method in operations research called data envelopment analysis. We show the benefits of the proposed approach and assess the performance of mutual funds. We compare the results with traditional indices of performance. An interesting result we obtain is that the mutual funds are all approximately mean-variance efficient.

Strategic Decentralization and Channel Coordination

In this paper, we show that under certain conditions, strategic decentralization through the addition of a retailer in the distribution channel can increase a manufacturers profits. The specific case on which we focus is the quantity coordination (double marginalization) problem for a manufacturer selling durable goods in a two-period setting. We show that the standard solution that coordinates a channel for non-durables does not coordinate the channel for durables. In particular, even though a manufacturer can achieve channel coordination by offering per-period, two-part fees, the equilibrium wholesale price in the first period is strictly above the manufacturers marginal cost. This is in stark contrast to the two-part solution for non-durables where the equilibrium wholesale price is equal to marginal cost. We also identify a strategy that solves both the channel coordination and the Coase problem associated with durable goods. In this strategy, at the beginning of period 1, the manufacturer writes a contract with the retailer specifying a fixed fee and wholesale prices covering both periods. We show that by adding a retailer and using this contract, the manufacturer makes higher profits than it could if it were to sell directly to consumers.

Research Note---The Role of Production Lead Time and Demand Uncertainty in Marketing Durable Goods

Firms often have to make their production decisions under conditions of demand uncertainty. This is especially true for product categories such as automobiles and technology goods where the lead time needed for manufacturing forces firms to make production decisions well in advance of the selling season. Once the firm has produced the goods, the available production volume affects the firms subsequent marketing decisions. In this paper, we study the relationship between the firms production and marketing decisions for a durable goods manufacturer. We develop a dynamic model of a durable product market in which the demand functions are developed from a micromodeling of consumer utility functions and an equilibrium analysis of consumer strategies. After taking into account the demand uncertainty as well as the potential for cannibalization of future sales, the manufacturer makes its production and sales decisions. We find that the firms optimal inventory level is U-shaped in the durability of the product and that the firm suffers a larger loss due to uncertainty when it is leases rather than sells its products. Furthermore, unlike the case for nondurables, for durable goods we find that the effect of uncertainty persists even after the uncertainty has been resolved.

Durable Good, Extended Warranty and Channel Coordination

The marketing literature on product warranty and extended warranty has largely focused on their role as segmentation instruments in risk-averse consumer markets. Preserving this insurance rationale, we highlight the role of extended warranty in channel coordination.We derive explicit demand functions for the durable good and extended warranty from a traditional model of consumer utility. This derivation explicitly captures the complementary goods flavor of extended warranty. We then investigate the impact of different distributional arrangements commonly observed in the marketplace for market outcomes and manufacturer profitability. We show that two key forces drive the results-the complementary goods effect and the double marginalization effect. Different channel arrangements for marketing of extended warranty cause these effects occur at different levels within a distribution channel and these are shown to have significant implications for the optimal warranty policy.

The Company That You Keep: When to Buy a Competitor's Keyword

In search advertising, brand names are often purchased as keywords by the brand owner or a competitor. We aim to understand the strategic benefits and costs of a firm buying its own brand name or a competitors brand name as a keyword. We model the effect of search advertising to depend on the presence or absence of a competitors advertisement on the same results page. We find that the quality difference between the brand owner and the competitor moderates the purchase decision of both firms. Interestingly, in some cases, a firm may buy its own brand name only to defend itself from the competitors threat. It is also possible that the brand owner, by buying its own branded keyword, precludes the competitor from buying the same keyword. Our result also implies that the practice of bidding on the competitors brand name creates a prisoners dilemma, and thus both firms may be worse off, but the search engine captures the lost profits. We also discuss the difference in our results when the search is for a generic keyword instead of a branded keyword. Finally, we find some empirical support for our theory from the observation of actual purchase patterns on Google AdWords.

The Better They Are, the More They Give: Trade Promotions of Consumer Durables

The authors study trade promotions for durable goods, such as automobiles, for which manufacturers provide special incentives to dealers for exceeding specific sales targets. They develop a theoretical model of consumer, retailer, and manufacturer behavior based on observations about key aspects of the automobile market. The analysis provides important insights about the intertemporal effects of trade promotions and the effect of product durability on the promotion strategies of manufacturers. For example, manufacturers of more durable products benefit more from running trade promotions and give deeper discounts. The authors find empirical support when they test the theoretical results.

Forward Buying by Retailers

Conventional wisdom in marketing holds that (1) retailer forward buying is a consequence of manufacturer trade promotions and (2) stockpiling units helps the retailer but hurts the manufacturer. This article provides a deeper understanding of forward buying by analyzing it within the context of manufacturer trade promotions, competition, and demand uncertainty. The authors find that regardless of whether the manufacturer offers a trade promotion, allowing the retailer to forward buy and hold inventory for the future can, under certain conditions, be beneficial for both parties. Disallowing forward buying by the retailer may lead the manufacturer to lower merchandising requirements and change the depth of the promotion. In competitive environments, there are situations in which retailers engage in forward buying because of competitive pressures in a prisoners-dilemma situation. Finally, when the authors consider the case of uncertain demand, they find further evidence of strategic forward buying. In particular, the authors find cases in which the retailer orders a quantity that is higher than what it expects to sell in even the most optimistic demand scenario.

Keyword Search Advertising and First-Page Bid Estimates: A Strategic Analysis

In using the generalized second-price GSP auction to sell advertising slots, a search engine faces several challenges. Advertisers do not truthfully bid their valuations, and the valuations are uncertain. Furthermore, advertisers are budget constrained. In this paper we analyze a stylized model of the first-page bid estimate FPBE mechanism first developed by Google and demonstrate its advantages in dealing with these challenges. We show why and when the FPBE mechanism yields higher profits for the search engine compared with the traditional GSP auction and the GSP auction with advertiser-specific minimum bid. In the event that a high-valuation advertiser is budget constrained, the search engine can use the FPBE mechanism to alter the listing order with the intent of keeping the high-valuation advertiser in the auction for a longer time. The resulting increase in the search engines profits is not necessarily at the expense of the advertisers because the combined profits of the advertisers and the search engine increase. This paper was accepted by J. Miguel Villas-Boas, marketing.

Aggregate versus product-specific pricing: Implications for franchise and traditional channels

Abstract Franchisors often charge a common franchise fee and royalty on all the products sold or serviced by their franchisees. Since the potential demand for each product may be different, a product specific pricing scheme may be optimal. Hence, the common strategy of aggregate pricing appears to be a puzzling practice. However, we show that under certain conditions the aggregate pricing scheme improves channel coordination of retail prices and local services, and improves the total channel profit and the franchisors profit. In order to highlight the important role of franchise fee, we also consider a traditional channel in which the manufacturer does not have enough market power to charge a positive franchise fee. We consider two pricing arrangements: quantity discount schedules and slotting allowances. We find that for a manufacturer using quantity discount schedules, aggregate pricing is (weakly) worse than product-specific pricing. If the retailers have enough power to extract all the surplus from the manufacturer through slotting allowances, then the manufacturer is indifferent between using product-specific and aggregate pricing.