Volume 2, Issue 1

The finite normal mixture model has emerged as a dominant methodology for assessing heterogeneity in choice models. Although it extends the classic mixture models by allowing within component variablility, it requires that a relatively large number of models be separately estimated and fairly difficult test procedures to determine the “correct” number of mixing components. We present a very general formulation, based on Dirichlet Process Piror, which yields the number and composition of mixing components a posteriori, obviating the need for post hoc test procedures and is capable of approximating any target heterogeneity distribution. Adapting Stephens’ (2000) algorithm allows the determination of ‘substantively’ different clusters, as well as a way to sidestep problems arising from label-switching and overlapping mixtures. These methods are illustrated both on simulated data and A.C. Nielsen scanner panel data for liquid detergents. We find that the large number of mixing components required to adequately represent the heterogeneity distribution can be reduced in practice to a far smaller number of segments of managerial relevance.

The marketing literature on product warranty and extended warranty has largely focused on their role as segmentation instruments in risk-averse consumer markets. Preserving this insurance rationale, we highlight the role of extended warranty in channel coordination.We derive explicit demand functions for the durable good and extended warranty from a traditional model of consumer utility. This derivation explicitly captures the complementary goods flavor of extended warranty. We then investigate the impact of different distributional arrangements commonly observed in the marketplace for market outcomes and manufacturer profitability. We show that two key forces drive the results-the complementary goods effect and the double marginalization effect. Different channel arrangements for marketing of extended warranty cause these effects occur at different levels within a distribution channel and these are shown to have significant implications for the optimal warranty policy.

The role of information in high-technology markets is critical (Dutta, Narasimhan and Rajiv 1999; Farrell and Saloner 1986; Weiss and Heide 1993). In these markets, the volatility and volume of information present managers and researchers with the considerable challenge of monitoring such information and examining how potential customers may respond to it. This article examines the effects of the type and volume of information on the market share of different technological standards in the Local Area Networks (LAN) industry. We identify three different types of information: technological, availability and adoption. Our empirical application suggests that all three types of information have significant effects on the market share of a technological standard, but their direction and magnitude differ. More specifically, technology-related information is negatively related to market share as it demonstrates that the underlying technology is immature and still evolving. Both availability and adoption-related information have a positive effect on market share, but the former is larger than the latter. We conclude that high-tech firms should emphasize the dissemination of information, especially availability-related, as part of their promotional strategy for a new technology. Otherwise, they may risk missing an opportunity to achieve a higher share and establish their market presence.

In many durable goods industries, firms continuously offer new products to customers and market them in different versions through different channel of distribution. This paper examines the issue of when to introduce the product into the different channels. The determinants of entry time include the discounting of future profits, the foresight of the firm, customers' expectations, and the possibility of cannibalization. Of special interest is the effect of customers' expectations about the timing of sequential entries. Specifically, it is shown here that profits decline if firms ignore the role of customer expectations. We discuss how our results can be used to get insights into the workings of the US motion picture industry, which is characterized by sequential introduction of movies first into theaters followed by home video. Finally, a closed form solution for an optimal sequential timing policy is provided.

We assess size and scope-related economies in the global advertising and marketing services business. A translog cost function is employed wherein a firm’s costs vary according to its scale and two dimensions of the scope of its operations. One dimension of firm scope relates to how its output is distributed across the global markets it serves (domestic vs. overseas) and the other to how its output is distributed across the line of services it offers (advertising-related vs. other marketing services). Parameters of the model are estimated via three stage least squares using annual data (1989-2001) for an unbalanced panel consisting of the eight largest holding companies in this industry.A firm’s total variable costs are affected by its scale, scope (mix of services and markets served), and by the interaction of the two dimensions of scope. The latter effect suggests that cost economies may accompany the dual diversification strategy of jointly offering advertising and marketing services globally. Estimates indicate that the industry’s long-run cost function is subject to very slight economies of scale, i.e., total variable costs increase less than proportionally as outputs increase. Consistent with the presence of modest global scale economies, product-specific diseconomies of scale accompany growth in volume obtained by extending either breadth of service offerings or market coverage. Scope economies arise when cost savings can be realized by a single firm jointly producing several services or jointly serving multiple markets as compared to splitting up the firm into smaller, stand-alone entities, each one producing just one service or serving a single market. A small cost advantage, typically of approximately two percent, is uniformly associated with joint production of services for both the domestic and overseas markets. Cost savings of a similar magnitude arise consistently from the joint production of advertising as well as other marketing services.

Suppose that consumers incur fixed shopping costs and choose stores according to advertised discounts. Then, the extent to which a store will discount advertised items should increase with the profit from other regularly-priced items. Bookstores customarily advertise discounts on bestsellers. Among conventional bookstores, we found that the bestseller discount systematically increased with the store area, selection of titles, and presence of other product categories. One standard deviation increase in store area was associated with a 3.7 (± 1.8) higher bestseller percentage discount. Among online stores, we found that the bestseller discount systematically increased with the selection of titles and number of product categories. One standard deviation increase in selection was associated with a 9.5 (± 2.2) higher bestseller percentage discount. These results indirectly confirm that booksellers discount bestsellers to attract consumers, and that consumers bear significant fixed shopping costs.

This short note introduces a new methodology for capturing and portraying the competitive structure of a market. Using the current Presidential contest as the context, the methodology first describes a simple and efficient data collection approach that generates the data necessary for applying Tversky’s Elimination-By-Aspects Model (1972a, 1972b) at the market level. Then, relying on recently published mathematical results (Batsell, Polking, Cramer, and Miller, 2003) the method shows the complete decomposition of the competitive structure of a market based on the elimination model. Also introduced is a new way to graphically portray the competitive structure of a market in the form of a choice-based perceptual map, which has several desirable properties.

The concept of Integrated Marketing Communications (IMC) emphasizes the role of synergy, which arises when the combined effect of multiple activities exceeds the sum of their individual effects. In this paper, we investigate the effects of synergy on the profitability of IMC programs in uncertain markets. We develop a dynamic multimedia model that incorporates both synergy and uncertainty, and use it to determine the optimal IMC program. Our results generalize previous findings to uncertain markets, illuminate the profit implications of IMC programs, and explain the catalytic effects of synergy in IMC contexts. Specifically, we find that the expected long-term profit of the advertised brand increases as synergy increases. Furthermore, managers should allocate a non-zero budget to a catalytic activity even if it is completely ineffective. Finally, these findings continue to hold in an uncertain duopoly market.