Ramnath K. Chellappa

Managing Piracy: Pricing and Sampling Strategies for Digital Experience Goods in Vertically Segmented Markets

Digital goods lend themselves to versioning but also suffer from piracy losses. This paper develops a pricing model for digital experience goods in a segmented market and explores the optimality of sampling as a piracy-mitigating strategy. Consumers are aware of the true fit of an experience good to their tastes only after consumption, and as piracy offers an additional (albeit illegal) consumption opportunity, traditional segmentation findings from economics and sampling recommendations from marketing, need to be revisited. We develop a two-stage model of piracy for a market where consumers are heterogeneous in their marginal valuation for quality and their moral costs. In our model, some consumers pirate the product in the first stage allowing them to update their fit-perception that may result in re-evaluation of their buying/pirating decision in the second stage. We recommend distinct pricing and sampling strategies for underestimated and overestimated products and suggest that any potential benefits of piracy can be internalized through product sampling. Two counterintuitive results stand out. First, piracy losses are more severe for products that do not live up to their hype rather than for those that have been undervalued in the market, thus requiring a greater deterrence investment for the former, and second, unlike physical goods where sampling is always beneficial for underestimated products, sampling for digital goods is optimal only under narrowly defined circumstances due to the price boundaries created by both piracy and segmentation.

Price Formats as a Source of Price Dispersion: A Study of Online and Offline Prices in the Domestic U.S. Airline Markets

A large body of research in economics, information systems, and marketing has sought to understand sources of price dispersion. Previous empirical work has mainly offered consumer-and/or product-based explanations for this phenomenon. In contrast, our research explores the key role played by vendors price-format adoption in explaining price dispersion. We empirically analyze over a half-million online and offline prices offered by major U.S. airlines in the top 500 domestic markets. Our study shows that a vendors price format remains an important source of price dispersion in both channels even after accounting for other factors known to impact dispersion in airline ticket prices. Importantly, this finding is true for both transacted and posted tickets. We document several other interesting empirical findings. First, the lower variance in the prices of “everyday low price” (EDLP) firms serves to reduce the market-level dispersion in prices when such firms are present. Moreover, the price variance of non-EDLP firms in these markets is also lower than in those markets in which EDLP competitors are absent. Second, we also find that dispersion in offered prices increases closer to the departure date, which is consistent with theoretical assertion that price dispersion increases with reservation prices. Finally, we continue to observe dispersion of online prices even after accounting for vendor strategy and other known sources of dispersion, suggesting that the prices are unlikely to converge even in the presence of sophisticated online search mechanisms.

An Economic Model of Privacy: A Property Rights Approach to Regulatory Choices for Online Personalization

Advances in information-acquisition technologies and the increasing strategic importance of this information have created a market for consumers personal and preference information. Behavioral research suggests that consumers engage in a privacy calculus where they trade off their privacy costs from sharing information against their value from personalization. Through a formal economic model of this personalization-for-privacy (p4p) trade-off, we examine welfare implications by characterizing consumption utilities as no-free-disposal functions. We investigate the optimality of four regulatory regimes (through allowance/disallowance of usageenforcing technologies, and private contracts) by analyzing the strategic interaction between a monopolist who offers personalization services free of charge and two consumer types-privacy and convenience seekers. While many privacy watchdog groups have called for technology restrictions and more regulation, our research broadly suggests that society is better off with assignment of property rights over their information to consumers and full allowance of technological control and contractual abilities for the monopolist. However, when private contracts are proscribed, the regulator should also prevent the deployment of usage-enforcing technologies, particularly when the market is predominantly composed of privacy seekers. Interestingly, unlike traditional price-instrument markets for goods with free disposal, a regulator should not only encourage this markets knowledge of consumers p4p preferences but also the various uses and benefits of preference information to the vendor.

Alliances, Rivalry, and Firm Performance in Enterprise Systems Software Markets: A Social Network Approach

Enterprise systems software (ESS) is a multibillion dollar industry that produces systems components to support a variety of business functions for a widerange of vertical industry segments. Even if it forms the core of an organizations information systems (IS) infrastructure, there is little prior IS research on the competitive dynamics in this industry. Whereas economic modeling has generally provided the methodological framework for studying standards-driven industries, our research employs social network methods to empirically examine ESS firm competition. Although component compatibility is critical to organizational end users, there is an absence of industry-wide ESS standards and compatibility is ensured through interfirm alliances. First, our research observes that this alliance network does not conform to the equilibrium structures predicted by economics of network evolution supporting the view that it is difficult to identify dominant standards and leaders in this industry. This state of flux combined with the multifirm multicomponent nature of the industry limits the direct applicability of extant analytical models. Instead, we propose that the relative structural position acquired by a firm in its alliance network is a reasonable proxy for its standards dominance and is an indicator of its performance. In lieu of structural measures developed mainly for interpersonal networks, we develop a measure of relative firm prominence specifically for the business software network where benefits of alliances may accrue through indirect connections even if attenuated. Panel data analyses of ESS firms that account for over 95% of the industry revenues, show that our measure provides a superior model fit to extant social network measures. Two interesting counterintuitive findings emerge from our research. First, unlike other software industries compatibility considerations can trump rivalry concerns. We employ quadratic assignment procedure to show that firms freely form alliances even with their rivals. Second, we find that smaller firms enjoy a greater value from acquiring a higher structural position as compared to larger firms.

Mechanism Design for “Free” but “No Free Disposal” Services: The Economics of Personalization Under Privacy Concerns

Online personalization services belong to a class of economic goods with a “no free disposal” (NFD) property where consumers do not always prefer more services to less because of the privacy concerns. These concerns arise from the revelation of information necessary for the provision of personalization services. We examine vendor strategies in a market where consumers have heterogeneous concerns about privacy. In successive generalizations, we allow the vendor to offer a fixed level of personalization, variable levels of personalization, and monetary transfers (coupons) to the consumers that depend on the level of personalization chosen. We show that a vendor offering a fixed level of personalization does not offer a coupon unless his marginal value of information (MVI) is sufficiently high, and even when personalization is costless, the vendor does not cover the market. Under a fixed services offering, the vendor serves the same market with or without couponing. Next, we demonstrate that in the absence of couponing, the vendors optimal variable personalization services contract maximizes surplus for all heterogeneous consumers, which is in contrast to standard results from monopolistic screening. When the vendor can offer coupons that vary according to personalization levels, the optimal contract is not fully revealing unless his MVI is high and he will not offer coupons when this MVI is low. However, a vendor with a moderate MVI (between certain thresholds) offers a bunched contract, wherein consumers with low privacy concerns receive a variable services-coupon contract, those with moderate privacy concerns receive a fixed services-coupon contract, and those with high privacy concerns do not participate in the market. The coupon value is decreasing in privacy sensitivity of consumers.

Privacy-enhanced personalization

Consumer surveys show that online users value personalized content [5]. At the same time, providing personalization on websites seems quite profitable for web vendors [2, 6-8]. This win-win situation is however marred by privacy concerns since personalizing peoples interaction entails gathering considerable amounts of data about them. As numerous recent surveys have consistently demonstrated, computer users are very concerned about their privacy on the Internet. Moreover, the collection of personal data is also subject to legal regulations in many countries and states. Both user concerns and privacy regulations impact frequently-used personalization methods. This workshop will explore the potential of research on privacy-enhanced personalization, which aims at reconciling the goals and methods of user modeling and personalization with privacy constraints imposed by individual preferences, conventions and laws.

Competing in Crowded Markets: Multimarket Contact and the Nature of Competition in the Enterprise Systems Software Industry

As more and more firms seek to digitize their business processes and develop new digital capabilities, the enterprise systems software (ESS) has emerged as a significant industry. ESS firms offer software components (e.g., ERP, CRM, Marketing analytics) to shape their clients digitization strategies. With rapid rates of technological and market innovation, the ESS industry consists of several horizontal markets that form around these components. As numerous vendors compete with each other within and across these markets, many of these horizontal markets appear to be crowded with rivals. In fact, multimarket contact and presence in crowded markets appear to be the pathways through which a majority of the ESS firms compete. Though the strategy literature has demonstrated the virtues of multimarket contact, paradoxically, the same literature argues that operating in crowded markets is not wise. In particular, crowded markets increase a firms exposure to the whirlwinds of intense competition and have deleterious consequences for financial performance. Thus, the behavior of ESS firms raises an interesting anomaly and research question: Why do ESS firms continue to compete in crowded markets if they are deemed to be bad for financial performance? We argue that the effects of rivalry in crowded markets are counteracted by a different force, in the form of the economics of demand externalities. Demand externalities occur because the customers of ESS firms expect that software components from one market will be easily integrated with those that they buy from other markets. However, with rapid rates of technological innovation and market formation and dissolution, customers experience significant ambiguity in deciding which markets and components suit their needs. Therefore, they look at crowded markets as an important signal about the legitimacy and viability of specific components for their needs. Through their presence in crowded markets, ESS firms can signal their commitment to many of the components that customers might need for their digital platforms. Customers might find that such firms are attractive because their commitments to crowded markets can mitigate concerns about compatibilities between the components purchased across several markets. This unique potential for demand externality across markets suggests that ESS vendors might, in fact, benefit from competing in many crowded markets. We test our explanations through data across three time periods from a set of ESS firms that account for more than 95% of the revenue in this market. We find that ESS firms do reap performance benefits by competing in crowded markets. More importantly, we find that they can enhance their benefits from crowded markets if they face the same competitors in multiple markets, thereby increasing their multimarket contact with rivals. These results have interesting implications not just for understanding competitive conduct in the ESS industry but also in many of the emerging digital goods industries where the markets have similar competitive characteristics to the ESS industry. Our ideas complement emerging ideas about platform models of competition in the digital goods industry and provide important directions for future research.

A model of advertiser--portal contracts: Personalization strategies under privacy concerns

Online portals provide personalization for “free”since the information acquired from consumers usage of these services is valuable for advertising and targeted marketing purposes. Consumers usage of services is determined by the tradeoff between their marginal value for personalized services and the resulting information privacy concerns and is captured by their personalization for privacy (P4P) ratio. A portals decision to offer personalized services is dependent upon its cost of offering the services and revenue due to advertisers marginal value for information (MVI) acquired therein. Through three models, our paper examines the strategic interaction between a portal that determines the service level to be offered and advertisers who pay the portal for placing advertisements through which they acquire information. Our first model of an independent portal finds that while all profits are increasing in the advertisers MVI, with increasing P4P ratio the advertisers profits are increasing at a faster rate than the portals profits. In our second model, we consider an information sharing regime between two advertisers and find that a high MVI advertiser has a distinct first-mover advantage in announcing the services rate for the entire market. Our final model considers a portal that has its own advertising capabilities and we find that while this case is superior to others in the high MVI advertisers and portals profits, the consumer welfare and overall social welfare is dependent on the relative valuations of the two advertisers.

Cost Drivers of Versioning: Pricing and Product Line Strategies for Information Goods

In this paper, we extend the understanding of versioning strategy of an information goods monopolist and provide new insights on when versioning is optimal. To do so, we derive the optimal product line or versions of an information good and the corresponding prices. By relaxing common assumptions on consumers’ usage costs, versioning costs and capital research and development costs, we provide new insights as well as reconcile extant findings on versioning. For a good with no-free-disposal (NFD), i.e., one where consumers have usage costs, our results show that a monopolist’s marginal cost and consumers’ usage costs have the same impact on its versioning strategy, and that these factors are the sole reason for optimality of versioning of information goods. By endogenizing the production of the highest-quality, we show that capital costs create a downward distortion of quality even for the highest types in the market even under full information. Presence of separate versioning costs also lowers the qualiti...

Balancing Knowledge Sharing with Knowledge Protection: The Influence of Role-Criticality

For knowledge-intensive, information-sensitive organizations, we suggest two orthogonal constructs, namely the perceived levels of knowledge sharing and knowledge protection, influence the perceived levels of organizational performance, to include the constructs of organizational responsiveness and organizational efficiency. For a large organization of more than 10,000 employees, we observe that a knowledge-workers role criticality directly and indirectly shapes perceived organizational performance. First, we find that greater perceived levels of knowledge protection and knowledge sharing strongly correlate with greater perceived levels of organizational performance (for both responsiveness and efficiency). Second, we find that workers with greater role-criticality negatively discount the contribution of knowledge protection to organizational performance, while they also positively accentuate the contribution of knowledge sharing to organizational performance (again, for both measures). Cumulatively, our research underscores the need to balance knowledge sharing and protection particularly when knowledge workers engage in critical organizational functions.