Tridib Mazumdar

A comparative analysis of reference price models

The effect of reference price on brand choice decisions has been well documented in the literature. Researchers, however, have differed in their conceptualizations and, therefore, in their modeling of reference price. In this article, we evaluate five alternative models of reference price of which two are stimulus based (i.e., based on information available at the point-of-purchase) and three that are memory based (i.e., based on price history and/or other contextual factors). We calibrate the models using scanner panel data for peanut butter, liquid detergent, ground coffee, and tissue. To account for heterogeneity in model parameters, we employ a latent class approach and select the best segmentation scheme for each model. The best model of reference price is then selected on the basis of fit and prediction, as well as on the basis of parsimony in cases where the fits of the models are not very different. In all four categories, we find that the best reference price model is a memory-based model, namely, one that is based on the brands own price history. In the liquid detergent category, however, we find that one of the stimulus-based models, namely, the current price of a previously chosen brand, also performs fairly well. We discuss the implications of these findings.

An Investigation of Reference Price Segments

Empirical research on reference price has typically assumed that consumers use either an internal reference price (IRP) or an external reference price (ERP), but not both, in brand choice decisions. In this article, the authors assume that consumers use both IRP and ERP but may consider one of them more salient than the other. The authors develop a model that segments consumers on the basis of the differences in the importance they assign to each type of reference price as well as in their brand preferences and responses to marketing-mix variables. The authors calibrate the model on data for four categories: liquid detergents, ketchup, tissue, and yogurt. In all four categories, the proposed model performs significantly better than the one that assumes that consumers use either IRP or ERP exclusively. The authors discuss the managerial implications of this finding.

Loyalty differences in the use of internal and external reference prices

Recent findings in reference price research suggest that consumer characteristics may affect whether they use an internal reference price (IPR) or an external reference price (ERP) in price judgments. In this paper, we investigate the role of one such characteristic, brand loyalty, in the use of either type of reference price. Specifically, we employ a latent class-type approach to divide consumers on the basis of their brand loyalty into an ERP and an IRP segment. Analysis of the margarine and liquid detergents categories shows that consumers who are highly loyal to a brand are likely to use external reference prices whereas less brand-loyal consumers rely on internal reference prices. We discuss the implications of this finding and suggest directions for future research.

Effects of price uncertainty on consumer purchase budget and price thresholds

This article examines how uncertainty about prices affects: (1) the budget consumers allocate for purchasing a product and (2) consumer price thresholds (i.e., the prices that are considered “too high” or a “good deal”). In an experimental setting, the purchase budget as well as the absolute values of both thresholds for uncertain subjects were higher than those for certain subjects. Moreover, a relatively large decline from the budget was needed before a price was considered a “good deal,” whereas a relatively small increase from the budget was sufficient for a price to be considered “too high.” Price uncertainty widened the difference between the upper (i.e., “too high”) price threshold and the budget, making uncertain subjects more tolerant to prices exceeding the budget than certain subjects. However, price uncertainty did not have a significant effect on the difference between the budget and the lower (i.e., “good deal”) price threshold.

A value based orientation to new product planning

Offers a framework which can assist managers to carry out new product planning and development activities with an explicit focus on consumer value perceptions. Describes how consumer perceptions of benefits and sacrifices are related to value perception. Presents conditions for successes of each orientation and provides directions for modifying strategic focus in response to changing conditions.

Launching New Products with Cannibalization Potential: An Optimal Timing Framework

A normative framework is proposed for the optimal introduction timing of a new product which has the potential for cannibalizing an existing product. The application of the proposed framework is illustrated using a numerical example. The paper also illustrates the sensitivity of the optimal timing to model parameters. The framework shows that as cannibalization increases, the launch timing needs to repostponed and the total profits decline; as the new product’s market potential or profitability increases, the optimal launch timing occurs later. Managerial implications for various scenarios are discussed.

Using a menu of geographic pricing plans: A theoretical investigation

Abstract In a menu plan of geographic pricing, the retailer allows a customer to choose either a free on board origin (F.O.B, origin) plan, or a uniform delivered plan. In this article, we develop an approach to construct the best menu plan and compare its profitability and market coverage with that of a uniform delivered plan and an F.O.B, origin plan when these are used alone. It is shown that a menu plan can generate at least as much profit as either an F.O.B, origin or a uniform delivered plan used by itself under any demand condition. However, whether the menu plan can outperform the F.O.B. origin and the uniform delivered plans depends on the specific demand conditions. When demand is linear in price and delivery cost is uniformly distributed, it is shown that the menu plan is substantially more profitable than the F.O.B, origin and the uniform delivered plans and generates at least 96% of the contribution of an optimal plan which sets a profit maximizing price for individual customers based on cost. On the other hand, when demand is a constant elasticity function of price, the menu plan is found to be only marginally superior to the F.O.B, origin plan which generates more profit than the uniform delivered plan.

Product Concept Demonstrations in Trade Shows and Firm Value

Trade shows are a popular venue for firms to demonstrate their portfolio of market-ready new products as well as product concepts under different stages of development. Utilizing auto shows as a context, the authors investigate the effects of concept and product demonstrations on the demonstrating firms value. Event study results show that abnormal returns follow an inverted U-shaped effect of product development stages: that is, previously demonstrated concepts approaching potential launch have the strongest positive effect, followed by early-stage concepts demonstrated for the first time to the world (i.e., debuts), and then market-ready new products. Trade show locations mediate these effects. The effects of early-stage debut demonstrations appear only when concepts are presented in trade shows located in the home country of the demonstrating firm. However, the effects of displaying previously demonstrated concepts, which have survived product development hurdles, are present in venues within as well as outside the firms home country.

Components of optimal price under logit demand

Demand for durables can be modeled using a logit framework in which a customer chooses one brand from several alternatives, or buys nothing at all. In this framework, optimal prices for competing brands can be expressed as a system of non-linear equations, which, however, do not have closed form solutions. Although the optimal price can be determined by numerical search, the solution offers limited understanding of its components. In this article, we develop a linear approximation of the Nash equilibrium optimal price of a brand as its marginal cost plus a weighted sum of: (1) the inverse of the price sensitivity of the market, (2) the average value added by all brands in the market, and (3) the value advantage (or disadvantage) of the brand. The weights depend primarily upon the number of competing brands, with price insensitivity having the strongest impact, followed by value advantage of the brand, and average value added by all brands. This approximation for optimal price is found to be robust under a wide range of conditions. Additionally, we demonstrate that using the approximation results in only marginal deviation of profits from the theoretical Nash optimal.

Counterfactual Decomposition of Movie Star Effects with Star Selection

We investigate the effects of a movie star on the movies opening week theater allocations and box office revenue. Because the pairing of a star and a movie involves a bilateral matching process between the studio and the star, the star (hence the nonstar) movie samples are nonrandom and the star variable is potentially endogenous. To assess the star as well as movie characteristics effects, we utilize a switching model to account for endogenous assignment of stars and nonstars into respective movie samples. In addition to controlling for selection biases, the endogenous switching model generates managerially relevant insights into the factors that influence a stars assignment to a movie. Additionally, because the star and nonstar movie characteristics (e.g., movie budget, distribution, genre, etc.) are often systematically different, we counterfactually estimate the theater allocations and revenues that nonstars (stars) would have generated had they acted in movies endowed with the same characteristics as the star (nonstar) movies. The decomposition analysis, conducted at different quantiles of theater and revenue distributions, shows that the presence of a star has a much stronger effect on theater allocations than the movie characteristics have. However, the revenue difference is entirely contributed by the differences in the characteristics of the star and nonstar movies. Thus, the star effects on revenue come indirectly through the theater allocations as well as from the characteristics of the movies in which they participate. This paper was accepted by Pradeep Chintagunta, marketing.