Pricing and Consumer Dynamics

Overview | Consumer Behavior | Pricing and Consumer Dynamics | Distribution Channels | Determinants of Brand Shares

“The Role of Marketing Activity and Contagion in Adoption”

Puneet Manchanda, associate professor of marketing; Nara Youn, professor University of Washington; Ying Xle, professor Rutgers University professor Ying Xie

Summary: Adoption of new products is often thought to be heavily influenced by word of mouth or imitation. The authors use a unique dataset on the detailing activities of pharmaceutical firms who target individual physicians. They are able to identify physicians “nearby” (in the sense of social networks) to early adopters of a new drug using physical location. The authors find evidence for a “contagion” effect. The detailing effect (on adoption) dominates early on but the contagion effect becomes more important over time. The authors also rule out some alternative adoption mechanisms.

“An Equilibrium Model of a Dynamic Auction Marketplace”

Robert Zeithammer, assistant professor of marketing

Summary: Auctions are assuming an increasingly important role as a selling method in both consumer and business-to-business marketplaces. In many auction markets, such as eBay, buyers usually face a sequence of auctions, each selling a unit of the same good. Zeithammer investigates how such buyers should bid strategically, and how sellers should optimally respond to strategic bidding. He finds that the buyers should “shade” their bids down, i.e. bid less than in an isolated auction.

However, bid-shading should only occur when the sellers are expected to sell another unit in the near future, which is not guaranteed because the seller can learn about demand from past prices and sell selectively. Taken together, the buyer and seller strategies describe an overall market equilibrium with an interesting “self-preservation instinct.”

“Do Switching Costs Make Markets Less Competitive?”

Jean-Pierre Dubé, Professor of Marketing and Neubauer Family Faculty Fellow; Günter Hitsch, associate professor of marketing; Peter E. Rossi, Joseph T. and Bernice S. Lewis professor of Marketing and Statistics

Summary: Loyalty programs have often been justified on the grounds that they are a form of switching costs that implicitly allow firms to charge higher prices as their customers become less price sensitive with incentives to remain loyal. This research challenges the assumptions behind this claim. The authors find that prices can actually fall in a world with switching costs relative to a world without switching costs. They estimate switching costs from CPG data and find that while the estimated switching costs are fairly large they are not large enough to cause prices to rise in a world with this level of switching costs.