Research

Abstract

Managers have long appreciated having loyal customers, and academic research has explored the benefits of loyal consumers as coming from reduced price competition. This paper extends this research by considering how loyalty affects firms’ decisions to facilitate search for nonloyal consumers. We show that in equilibrium, the store with more loyal customers ends up having lower search costs even if facilitating search is costless. The intuition for this result is that nonloyal consumers expect higher prices at a store with a larger loyal segment, and therefore, this store has to set a lower search cost to counteract the negative effect of this expectation. Given this, it is optimal for the other store to set a higher search cost to avoid intensifying price competition. As a consequence, a larger loyal segment may lead to both higher prices and a higher market share among nonloyal customers. In other words, an advantage in customer loyalty leads to the store becoming the search hub of the nonloyal customers. This, in turn, implies that even a small advantage in customer loyalty may lead to a large increase in profits and may help explain why some managers place such a high value on earning customer loyalty.

Abstract

In this paper, we investigate advertisers’ budgeting and bidding strategies across multiple search platforms. We develop a model with two platforms and budget-limited advertisers that compete for advertising slots across platforms. When platform reserve prices are low and exogenous, we find that symmetric advertisers pursue asymmetric budget allocation strategies and partially differentiate: one advertiser allocates a share of its budget to platform A higher than A’s share of user traffic and a share of its budget to platform B lower than B’s share of user traffic, whereas the second advertiser does the reverse. This partial differentiation balances two forces: a demand force arising from a desire to be present on both platforms to obtain more clicks and a strategic force driven by a desire to be budget-dominant on at least one platform to obtain clicks at a lower cost. We then show that the benefit from differentiation for advertisers diminishes if platforms strategically increase their reserve prices. At reserve prices that maximize platform revenues, advertisers allocate their budgets proportional to each platform’s share of user traffic, and platforms fully appropriate these budgets.

Abstract

Conventional advice to firms in competitive markets is to raise barriers against competitive poaching of their customers. However, we see instances where a firm enables competitor advertising to its customers. For example, Walmart hosts banner ads for TVs from Sears to customers searching for TVs on Walmart.com, risking a loss of customers in exchange for a commission. This paper explores whether and under what conditions allowing competitor advertising in one’s store may be a beneficial strategy. We analyze a duopoly market where customers are heterogeneous in search costs, information, and preferences. We find that hosting a competitor ad for an undifferentiated product can mitigate price competition and boost profits of both firms if the advertising commission is high enough. Otherwise, hosting competitor advertising may decrease the profits of both firms. Thus, there is no conflict of interest between firms in advertising and in setting the ad commission level. Yet the host prefers more efficient ads while the advertiser does not. Furthermore, the equilibrium outcome is asymmetric, with only one store featuring ads of the other. If stores are sufficiently differentiated in marginal costs of the product, the cost-disadvantaged store will be the host. We show that the results are robust to displaying price in the ad, to different commission structures, and to customer uncertainty about the commission rate.

Abstract

Many firms buy a production input from a competitor. However, managers often worry that this supply relationship may give their competitor valuable knowledge about new product innovations. We develop a two-period model in which a firm can buy an input from a competitor or a third party in each period. In order to innovate, the firm must invest in improving the input, which results in its supplier learning to produce a higher quality input. We find that buying from the competitor: (1) mitigates price competition in the consumer market, and (2) puts the competitor in a stronger negotiating position in the second period if the focal firm invests in innovation. In equilibrium, if the value of the innovation is sufficiently low or sufficiently high, the firm buys from its competitor. However, if the value of innovation lies in an intermediate range, and there is sufficient horizontal product differentiation, then the firm buys from the third party to ensure innovation occurs in equilibrium.

Abstract

More intense consumer search across firms may lead to both stronger price competition and a better match between customers and products. We show that the net result of these forces may lead to either shorter or longer product lines, and higher or lower prices and profits depending on the distribution of product valuations across consumers, even if there is no market expansion effect (i.e., if all consumers buy). We derive a general condition on the distribution (related to its hazard rate) under which lower search costs lead to longer product lines even when the market expansion effect is absent, thus highlighting the critical role of the value distribution in determining firms’ optimal strategies in competitive markets. In particular, when consumer search costs decrease, product lines become longer if the distribution is Exponential or Log-Normal, become shorter if the distribution is Normal, Logistic, or Gumbel-Minimum, and do not change if the distribution is Gumbel-Maximum. With uniformly distributed product values, equilibrium prices and product lines exhibit an inverted-U-shaped relationship. Incorporating the market expansion effect, firms have an additional incentive to expand product lines when search costs decrease, and the relationship between search costs and equilibrium product line length may reverse direction.

Abstract

Many online search or product platforms (such as Google and Amazon) offer advertising (ad) positions that are different in their “prominence” - the likelihood of attracting the customer’s attention or click. In this paper, we investigate advertisers and platforms strategies when two conditions exists in the market: (i) there are multiple competing platforms for advertisers to reach customers, and (ii) there are customers who visit and search across these platforms (“cross-searchers”). First, we find that, in the presence of customer cross-searching, sufficiently similar advertisers will “differentiate” by obtaining a more prominent ad position on one platform and a less prominent ad position on the other. Second, if platform ad positions are not highly prominent, more cross-searching by consumers can lead to higher profits to both advertisers and platforms (a win-win situation). Third, we show that customer cross-searching can benefit advertisers by inducing competition between platforms and lowering the equilibrium reserve prices. Our work has important managerial implications for platforms and advertisers in marketplaces where customers visit and search across multiple platforms.

Abstract

Previous literature has shown that customer loyalty can benefit firms by mitigating price competition. Accordingly, many store managers strive to create loyal customers (e.g., by developing loyalty programs). We investigate the impact of store loyalty in markets where customers search among differentiated products to resolve uncertainty about product fit. We find that an industry-level increase in the number of store-loyal customers hurts profits when (i) customers’ search cost for product fit is high or (ii) the number of products carried by each store is low. In these situations, stores can benefit from more non-loyal “cross-searchers” in the market because it lowers prices and expands the demand by improving the chances of finding products that fit. We also derive the equilibrium order in which cross-searchers visit different stores when these stores are asymmetric in the number, average quality, or diversity of their products. Cross-searchers start their search from a store that has more products, higher-quality products, or fewer loyal customers. Moreover, they initially visit a store with more (less) diverse products when the search cost is sufficiently low (high). We show that an industry-wide increase in loyalty can lower the value of prominent store locations (e.g., top-of-the-page ad slots).

Abstract

Ad-blockers enable consumers to block ads on websites. While ad-blockers began as user-oriented initiatives promising to block all ads, many now allow limited display of ads. Much of the ensuing debate has questioned the role and intent of the ad-blocker, viewing ad-blocking as a zero-sum game between consumers and the website publisher. We show limited ad-blocking (LAB) can transform ad-blocking to a win-win for all. In fact, even a user-oriented ad-blocker may offer LAB, while also benefiting the publisher and leading to better website content than in the absence of ad-blocking. Specifically, LAB can be used to incentivize content provision in two distinct ways: not just by enabling a publisher monetize website visits from ad-blocker users, but also by limiting the publisher’s ability to attract ad-blocker users if website content quality is low; since, by not blocking all ads, LAB can make a low-quality website less attractive for ad-blocker users. From the publisher’s perspective, although the publisher faces pressure to lower its website ad intensity to counter ad-blocking, LAB can emerge as an indirect means to discriminate ad intensity across consumers since they sort themselves according to their tolerance for ads through adopting the ad-blocker. We show beneficial discrimination can occur if consumers with higher valuation of content quality also find ads more disruptive and are less tolerant of ads. Interestingly, the ad-blocker may be more widely adopted when it employs LAB than when it does not. Furthermore, even a user-oriented ad-blocker may charge its users a fee.

In this work, we empirically examine one of the critical aspects of consumer search and purchase behavior in online marketplaces that have been largely overlooked in the literature. How do online customers search and purchase across different product categories (e.g., electronics and apparel)? What are the cross effects of one category’s pricing or promotional strategies on another category’s consideration and purchases? Using click-stream data (from Google’s e-commerce platform), which has detailed (click-level) customer search, browsing, and purchase data, we estimate a structural model of demand that incorporates both own- and cross-category effects. We adopt a Bayesian approach with Markov Chain Monte Carlo (MCMC) sampling methods to estimate model parameters. The results of this research will help managers more effectively coordinate prices and promotions across different categories of e-commerce platforms.

In this paper, we show that AAT may serve as a “coordination device” between publishers and improve their profits: Without AAT, publishers cannot commit to the industry-optimal level of advertisement and hence over-advertise, which in turn reduces the market price of ads. Interestingly, we find that the emergence of AAT may coordinate the market and benefit publishers only if it is sufficiently costly for publishers to fight AAT, for example, by adopting anti-AAT technologies (technologies that allow publishers to detect AAT users and ban them from their websites). This analysis sheds light on the role of the strategic AAT in the market as a “coordinator” benefiting the publishers or as an “extortionist” extracting their profits.