Rakesh Niraj

Does Quality Win? Network Effects versus Quality in High-Tech Markets

Researchers disagree about the critical drivers of success in and efficiency of high-tech markets. On the one hand, some researchers assert that high-tech markets are efficient with best-quality brands being dominant. On the other hand, many scholars suspect that network effects lead to perverse markets in which the dominant brands do not have the best quality. The authors develop scenarios about the relative importance of these effects and the efficiency of markets. Empirical analysis of historical data on 19 categories shows that though both quality and network effects affect market share flows, in general markets are efficient. In particular, market share leadership changes often, switches in share leadership closely follow switches in quality leadership, and the best-quality brands, not the ones that are first to enter, dominate the market. Network effects enhance the positive effect of quality.

Examining mediating role of attitudinal loyalty and nonlinear effects in satisfaction‐behavioral intentions relationship

Purpose – This paper aims to examine the mediating role of attitudinal loyalty in the relationship between satisfaction and customer behavioral intentions such as willingness to pay more and internal and external complaining responses. It also seeks to examine the nonlinear effects in the relationship between satisfaction, attitudinal loyalty and behavioral intentions.Design/methodology/approach – The paper adopted the structural equation modeling approach to test the hypotheses (sample size 202). It used Marsh et al.s unconstrained method to test latent quadratic effects in the conceptualized relationships.Findings – The results support the fully mediating role of attitudinal loyalty in the relationship between satisfaction and behavioral intentions. The paper also finds partial support for nonlinear effects in the relationship. Results support nonlinearity, and in particular diminishing sensitivity, in the link from attitudinal loyalty to willingness to pay more.Originality/value – The paper adds to th...

Research Note---A Cross-Category Model of Households' Incidence and Quantity Decisions

This paper advances the literature on multicategory demand models by simultaneously handling more than one purchase decision of the household. We propose a two-stage bivariate logit model of incidence and quantity outcomes in multiple categories. Our results show that cross-category promotional spillovers are asymmetric between the two product categories of bacon and eggs. The total retail profit responds more to bacon price than to egg price. Promoting bacon is found to have a bigger impact on egg profit than the impact of egg promotion on bacon profit. We decompose (1) the total retail profits, as well as (2) the cross-category profit impact of a price promotion, into its two components, and find that (1) 23% (67%) of the total retail profit impact of a promotion on bacon (eggs) arises on account of quantity effects, and (2) 40% (33%) of the increase in egg (bacon) profit from promoting bacon (eggs) is on account of quantity effects.

Information and Inventory in Distribution Channels

We examine the trade-offs between demand information and inventory in a distribution channel. While better demand information has a positive direct effect for the manufacturer in improving the efficiency of holding inventory in a channel, it can also have the strategic effect of increasing retail prices and limiting the extraction of retail profits. Having inventory in the channel can help the manufacturer to manage retail pricing behavior while better extracting retail surplus. Thus, even if the information system is perfectly reliable, the manufacturer might not always want to institute an information-enabled channel over a channel with inventory. We show this first in a channel with a single retailer, where the channel with perfect information is preferred over the channel with inventory only if the marginal cost of production is sufficiently high. We also analyze a channel with an imperfectly reliable information system and find that if the manufacturer were to choose the precision of the demand information system, it might not prefer perfect information, even if such information was costless to acquire. In a channel with competing retailers, the channel with perfect information is preferred when retail competition is sufficiently intense. Thus, the presence of inventory can play a role in managing competition among retailers and in helping the manufacturers to appropriate surplus especially when retailers are sufficiently differentiated.

Understanding customer level profitability implications of satisfaction programs

Purpose – Achieving high level of customer satisfaction (CS) involves spending marketing resources in terms of money, managerial time, and focus. Consistent with the return on quality framework this paper aims to look at both the costs and benefits of a satisfaction program.Design/methodology/approach – This paper reports the results of a longitudinal study of a beverage distributor. Two satisfaction surveys were conducted before and after the launch of the program. Profitability was calculated using activity based costing (ABC) principles. The link between changes in satisfaction and changes in profitability was analyzed.Findings – It was found that as a result of the launch of satisfaction program CS increased significantly, but the weighted least square analysis of the relationship between CS and customer profitability (CP) shows that it does not necessarily result in higher customer profits. CS is found to be positively related to sales volume and gross profits at the customer level. However, a net pr...

The Impact of Geographic Proximity on What to Buy, How to Buy, and Where to Buy: Evidence from High‐Tech Durable Goods Market*

Social contagion effects due to geographical proximity refer to the social effects wherein the behavior of an individual varies with the behavior of other individuals who are geographically close. Although the influence of such effects on consumer choices has been established in several contexts, much of the extant studies have focused on its effect on consumers’ decision of whether to buy a new product or adopt a new innovation. There has been no systematic examination of the influence of geographic proximity on other aspects of consumers’ product buying process such as what to buy (i.e., brand choice), how to buy (i.e., the channel), and where to buy (i.e., retailers). Such effects can matter significantly in high-technology and durable goods markets and therefore, it is critical to understand the scope of these on consumers’ choice of retailers and channel as well. Drawing on literatures from word of mouth effects, ecommerce, and consumers’ perception of risk in their purchase process, we develop a set of hypotheses on the effect of geographic proximity on consumers’ choices of what to buy, how to buy, and where to buy. Leveraging a microlevel dataset of purchases of personal computers, we develop brand-, retailer-, and channel-related measures of proximity effects at the individual consumer level and estimate a joint disaggregate model of the three choices that make up a product purchase process to test these hypotheses. Our results indicate a significant contagion effect on each of the three choices. Furthermore, we find evidence of a greater effect of geographic proximity on inexperienced consumers—those who are new to the product category. Our results thus help develop a holistic understanding of the influence of social contagion effects on consumers’ decision making.

Vertical Information Sharing in Distribution Channels

This paper examines the information-sharing behavior of firms in a distribution channel context. While information sharing among firms can occur in a horizontal (among competitors) or vertical (channel members) context, previous attempts at modeling information sharing has primarily been restricted to the horizontal context. For marketers, channel alliances are interesting in view of their growing popularity as witnessed by initiatives like ECR and category management. Such initiatives usually involve the pooling of, often complimentary, information available with manufacturers and retailers. It is argued that such pooling of information should lead to better decision-making and hence it is desirable. However, in practice, category management is often implemented with a somewhat interesting institution of category captain, which appears to be a restricted form of information pooling. It involves the retailer entering into an alliance with only one (of many) supplier in a category, who is accorded the role of category captain. We first analyze the information sharing incentives of the two industry participants, manufacturer and retailer, in a bilateral monopoly. We find that whether sharing will occur or not is crucially dependent on the baseline quality of information available with the firms and on the degree of complementarity of resources that in turn determine how effective information pooling is. Next, using a model of competing symmetric duopolists selling through a common retailer, we show that information sharing between the alliance partners can sometimes give rise to the emergence of the so-called category captain, i.e., an exclusive alliance. The total channel profits and those of the partners in alliance go up. This increased profit is due to higher average wholesale prices, which can be interpreted as reduction in price promotions, a key goal of the category management initiative. The model generates predictions about when information- sharing alliances are more likely and can also be extended to answer managerially relevant question for retailers, i.e., who to choose as category captain?

Uncovering Customer Profitability Segments for Business Customers

Purpose: A central premise of relationship marketing theory is that economic benefits flow from retaining customers. However, the early research focus on the duration of the relationship may obscure other important aspects of the interaction with the customer that drive profitability. Borrowing from the branding literature, where different types of customer relationships have been described (but not empirically examined), the authors segment customers based on their buying behaviors over time and uncover several distinct patterns of profitability. Methodology: To arrive at a refined measure of customer profitability, the authors allocate costs using activity-based costing. They then segment customers using a finite mixture model relating customer buying characteristics over time to profitability over a three-year period. Findings: Their analysis yields six segments, each with its own unique relationship profile. They find that determinants of profitability vary across the six segments. Interestingly, in none of these segments does longer duration correlate with higher profitability. Contributions: First, the research provides insight into the importance of recognizing different types of buying patterns over time and their impact on profitability. Second, this research provides managers with a method to allocate resources across customer segments that are identifiable using readily available transactional data. Third, the authors contribute to the segmentation literature by adapting and empirically validating buying behaviors as an appropriate basis for segmentation. Specifically, they build on prior research that uses buying behavior to micro-segment customer bases in industrial markets.

Commentaries and Rejoinder to "Does Quality Win? Network Effects Versus Quality in High-Tech Markets"

A substantial body of theoretical literature indicates that network effects may hinder the entry of higher-quality products into markets in which network effects are impor tant. However, Tellis, Yin, and Niraj (2009) provide com pelling evidence that, in general, higher-quality offerings win out in software markets after a short time lag. Because software markets are commonly believed to be susceptible to network effects, this finding provides important empiri cal evidence against the hypothesis that network effects impede entry. Because Tellis, Yin, and Niraj obtain their results across a large number of product categories and because their analysis holds up across various methods, their evidence that high quality trumps network effects is impressive. However, in the final section of the article, Tellis, Yin, and Niraj are careful to provide a set of limitations for their research. Because I believe that their results must be quali fied in the light of these limitations, I elaborate on some of these in my comment. Because the authors have gone about as far as possible with the data at their disposal, this com ment is intended to stimulate further research on the topic of network effects and quality. Consistent with Tellis, Yin, and Nirajs research objec tives, their conceptual model focuses on the demand side and factors that might affect consumer response, but the supply side is also important. In particular, it is not known whether the firms refrained from developing or marketing products because they judged that network effects were too difficult to overcome. Thus, the results are subject to a sam ple selection problem, in which only products that suppliers believed to be worthy of introduction on the market were selected. Because the sample is limited to cases in which suppliers believed that introducing the product on the mar ket was justified in the face of any network effects, this cre ates an unknown bias toward showing that quality can over come network effects. A related consideration is that suppliers have ways of dealing with network effects or even using them to their advantage. One is to make the higher-quality product com patible with its predecessor, such as making Excel compati ble with Lotus. Another is to arrange to have software bun dled with the sale of new computers, thus forcing its acceptance in the market. For example, a current buyer of a Windows computer must either accept Vista or have some one uninstall this software in favor of an older version, a time-consuming and expensive process. This bundling may have facilitated the adoption of Windows, Word, Excel, Internet Explorer, PowerPoint, AOL, and possibly other software types. Supplier actions to mitigate network effects, such as compatibility and bundling, do not invalidate the general findings in Tellis, Yin, and Nirajs article. Rather, they may help explain how and why network effects can be overcome.

EXAMINING INCENTIVES TO SHARE DEMAND INFORMATION WITH YOUR CHANNEL PARTNER

In this paper, we examine the information-sharing behavior of firms in a distribution channel context. Channel alliance initiatives like ECR and category management often involve pooling of information available with manufacturers and retailers. Such pooling of information should lead to better decision making and hence it is desirable. However, in practice, category management is often implemented with an intriguing institution of category captain, that involves the retailer entering into an alliance with only one (of many) supplier in a category. We first analyze the information sharing incentives of a manufacturer and retailer in a bilateral monopoly and identify the importance of quality of information available with the firms and the degree of complementarity of resources in determining the effectiveness of information sharing. We then show how these forces might lead to the emergence of the category captain phenomena in a model with competing manufacturers selling through a common retailer.