A Theoretical Analysis of the Pricing and Advertising Strategies with Lévy-Walking Consumers

The pervasive adoption of mobile devices and proximity technologies enables firms to trace consumers’ trajectories and locations. This connects firms’ marketing and operations strategies more tightly with consumer mobility. In this paper, we propose a novel analytical model to examine the economic effects of consumer mobility on pricing and advertising strategies by incorporating consumers’ Lévy-walking behavior into advertising economics models. We ascertain the convergent effect of consumer mobility, i.e., consumers’ convergence to a firm leads to higher product price and advertising level. Meanwhile, it improves social welfare by increasing firm profit and consumer surplus. More interestingly, we find that consumers’ average movement distance (AMD) has opposing influences in pricing and advertising strategies. Specifically, longer AMD strengthens the convergent effect on advertising strategy but weakens that on pricing strategy. Finally, we also conduct a numerical analysis to uncover the impacts of the presence of proximity technologies on advertising outcomes. The results of this paper provide advisable guidance to firms on how to craft and adjust pricing and advertising strategies in accordance to consumer mobility. Moreover, the results present insights on welfare implications of informative advertising from the perspective of consumer mobility.

Disclosure to Regulate Learning in Product Markets from the Stock Market

A firm’s stock price may reveal information to a variety of participants, including its strategic partners and competitive rivals. This paper establishes that when a firm discloses cost information it can confound decision-relevant demand information embedded in the stock price that observers can otherwise extract. With stock price valuing firm profit (not cost and revenue separately), a disconnect is introduced between the firm’s actions and its intent – it discloses more (less) on one dimension when its intent is to conceal (reveal) on another. Moreover, the firm’s intent can be to either reveal or conceal information depending on what gives its partner the best competitive edge over its rival. Consequently, a firm’s disclosure is made strategically, incorporating valuation and competitive effects. Interestingly, the firm’s disclosure strategy is designed in close concert with its production decision, i.e., the firm’s optimal accounting and real decisions interact with each other for maximum impact.

EXPRESS: Examining Why and When Market Share Drives Firm Profit

Many firms use market share to set marketing goals and monitor performance. Recent meta-analytic research reveals the average economic impact of market share performance and identifies some factors affecting its value. However, empirical understanding of why any market share-profit relationship exists and varies is limited. We simultaneously examine the three primary theoretical mechanisms linking firm market share with profit. On average, we find most of the variance in market share’s positive effect on firm profit is explained by market power and quality signaling, with little support for operating efficiency as a mechanism. We find a similar explanatory role of the three mechanisms in conditions where market share negatively predicts profit (for niche firms and those “buying” market share). Using these mechanism insights, we show the value of market share differs in predictable ways between firms and across industries, providing new understanding of when managers may usefully set market share goals. We also provide new insights into how market share should be measured for goal setting and performance monitoring. We show that revenue market share is a predictor of firm profit while unit market share is not, and that relative measures of revenue market share can provide greater predictive power.

Insider Trading, Competition, and Real Activities Manipulation

We consider a setting where managers manipulate the firms’ real activities in anticipation of insider trading opportunities. Managers choose strictly higher production quantities than the quantities chosen absent insider trading, implying lower firm profit but higher consumer surplus. Through comparative statics, we show the overproduction is mitigated by the degree of competition in the industry, the manager’s current equity stake in the firm, and the precision of cost information. We also analyze the effects of insider trading in several extensions including asymmetric ownership structure, potential horizontal merger, and common market maker. This paper was accepted by Shiva Rajgopal, accounting.

Ecolabel: Is more information better?

We study in this paper the effect of the type of information provided by an ecolabel. For this purpose, in the framework of a model of vertical differentiation, we compare the effects of a partial information label (Type I) and a complete information label (Type III) on firms' profits, industry profit, consumers' surplus, environmental damage and social welfare. A partial information label indicates that the environmental quality of a good exceeds some given threshold. The authority issuing a partial information label chooses its labeling criteria while maximizing the social welfare. A complete information label indicates the exact environmental quality chosen by firms. We prove that while a partial information label always improves the social welfare and deteriorates the green firm profit compared to a complete information label, the comparison between the two types of ecolabel in terms of the brown firm's profit, the industry's profit, the consumers surplus and the environment depend in a non-obvious way on the marginal cost of quality and on the environmental sensitivity to quality.

Quality Disclosure Under Consumer Loss Aversion

Consumers experience a sense of loss when a product’s quality does not match their expectations. To alleviate consumer loss aversion (CLA), firms can disclose information to reduce consumers’ uncertainty about product quality and the resulting psychological loss. In this paper, we investigate the implications of CLA on firm profit, consumer surplus, and social welfare when firms endogenously make quality disclosure decisions. We find that CLA leads symmetric firms to disclose quality more often. Given that CLA weakly reduces consumers’ utility from buying a product and quality disclosure is costly, intuition suggests that CLA is detrimental to firms. We find that this intuition is true only in a monopoly. Surprisingly, CLA makes both firms in a competition better off. Moreover, CLA increases firms’ profit when they invest in quality disclosure instead of money-back guarantees to respond to CLA. We also find that CLA decreases consumer surplus and social welfare. Therefore, educating consumers to improve decision-making skills by deliberating on future outcomes and emotions can benefit firms at the cost of consumers and society. When firms disclose quality sequentially, CLA can discourage the follower from disclosing quality. A strong level of CLA increases the leader’s profit over the follower’s, thereby encouraging firms to be the first mover in quality disclosure. This paper was accepted by Juanjuan Zhang, marketing.

Free Shipping Promotions and Product Returns

Free shipping promotions have become popular among online retailers. However, little is known about their influence on consumers’ purchases, return behavior, and, ultimately, firm profit. The authors propose that free shipping promotions encourage customers to make riskier purchases, leading to more product returns. They estimate the impact of these promotions on purchase incidence, high-risk and low-risk spend, and return share. The results show that free shipping promotions increase expenditure for high-risk products, expanding their share of the consumer’s market basket and thus increasing the overall return rate. This is validated in a field experiment. A field test and an online lab experiment analyze the mechanism linking free shipping and returns. The results suggest that the free shipping effect occurs through consumers’ perceptions that free shipping serves as a risk premium compensating them for potential returns and through positive affect generated by the promotion. A simulation shows that for the focal firm, free shipping promotions increase net sales volume, but higher product returns and lost shipping revenue render these promotions unprofitable.