Recent Advances in Structural Econometric Modeling: Dynamics, Product Positioning and Entry

In the empirical analysis of consumer markets, recent literature has begun to explore the dynamics in both consumer decisions as well as in firms' marketing policies. Other research has begun to explore the strategic aspects of product line design in a competitive environment. In both cases, structural models have given us new insights into consumer and firm behavior. For example, incorporating consumer and firm dynamics may help explain patterns in our data that are not well-captured by static models. Similarly, the strategic aspects of firm entry and product-positioning may be intrinsically linked to firm conduct and the intensity of competition in a market. Structural analysis of these consumer and firm decisions raise a number of substantial computational challenges. We discuss the computational challenges as well as specific empirical applications. The discussions are based on the session “Structural Models of Strategic Choice” from the 2004 Choice Symposium.     

Seller honesty and product line pricing

We study upselling in markets where the seller observes consumer need but the consumer herself may not (e.g., medical care, durable repairs, financial and legal services). The seller may recommend excessive product features to uninformed consumers. In a monopoly with two types of consumer (one with a basic need and the other an advanced need) and two types of service (a basic service which fulfills only the basic need and an advanced service which fulfills both needs), we investigate the firm’s honesty and product-line pricing. We reach several results. First, the firm is honest if the basic service is superior (in that it generates higher per-capita social surplus than the advanced service under the efficient allocation) or if the consumers with the basic need are sufficiently many. Second, when there exist informed consumers who neglect seller recommendation, the presence of informed consumers may cause consumer welfare to decrease, and a larger informed population may cause firm profits and social welfare to increase or decrease. Lastly, when the informed consumers boycott a dishonest firm and withhold purchase, firm profits may increase because the threat of boycotting makes the firm more credible and allows a higher price of the advanced service.     

Technology profiles and export marketing strategies

This paper defines four different profiles which reflect the nature and level of a firm's technological involvement in exporting and foreign sales. It is also possible to characterize a firm's export marketing strategy along a reactive-proactive continuum. Technology profiles and marketing strategies are then linked together to suggest the optimal approach to developing overseas markets for a given type of firm. A number of essential requirements for successful export marketing are also described. It is suggested that success requires a combination of innovation, adaptation, and an appropriately selected marketing strategy.     

Disembedding Socialist Firms as a Statist Project: Restructuring the Chinese Oil Industry, 1997-2002

Crucial to the success of China’s transition to the marketeconomy is the central government’s capacity for institutionalinnovation. Since 1997, Chinese politicians have sought to transformthe governance of state-owned industries from decentralizedadministrator control to centralized corporate shareholder control.This essay examines the ideological, political, and institutionalcomponents of the central state’s strategy of "disembeddedness"that aimed to disrupt preexisting social norms and exchangerelations of the planned economy. However, this authoritarianapproach to organizational change has generated sociopoliticalcontentions and unintended economic outcomes that point to alternativeconceptions of authority and exchange relations at industrialand firm levels. Focusing on the recent restructuring of theoil and petrochemical sectors into national oil corporations,I provide evidence of how certain types of informal social dynamicshave shaped and constrained the implementation of asset controlstrategies and industrial policies favored by the state, withdirect implications for the proper functioning of new marketinstitutions.     

Managing Market, Hierarchy, and Network: The Jiuda Salt Industries, Ltd., 1917-1937

As China underwent industrialization during the Republican period,how did companies deal with the problems of expansion, competition,and relationship with the state? Using the concept of networkcapitalism, this article demythologizes the "enigma" of Chinesenetwork by analyzing the experience of the Jiuda Salt Industries,Ltd. Fan Xudong, the company’s founder, deftly managedhis network portfolio for information and other resources. Kithand kin as shareholders, interlocking directorates, and cross-shareholding,as well as hierarchical management and cartels, were utilizedto raise capital and manage local markets. Market, hierarchy,and network thus constitute three complementary organizationprinciples in explaining Jiuda’s success.     

How incumbent firms foster consumer expectations, delay launch but still win the markets for next generation products

Consumers learn quality of many durable products through word-of-mouth information while firms launch new and improved products frequently in these markets. This paper examines firm incentives to invest in R&D to compete for patents in makets where consumers rely on word-of-mouth information and have expectations about the new products before launch. When its loss due to a possible entry is above a threshold, an incumbent has more incentives than a potential entrant to invest in R&D for patents. Moreover, if the current product is more profitable, its true quality is above consumer priors and the quality of the new product is below a threshold, it is optimal for the incumbent to launch the new product after a time lag. The later the optimal time of launch, the greater is the incumbent’s potential loss if entry occurs and greater its incentives is to invest in R&D versus that of the entrants. While potential entrants are generally thought to have more incentives to invest in a drastic innovation which results in a race to launch the new products, we show that the more drastic the innovation, the later the optimal time of launch and greater are the incumbent’s incentives to invest in R&D when the value added of the new product can be conveyed to all the consumers. Only when consumers are uncertain about the value added of the new product, the incumbent’s incentives are lower. We also demonstrate that by promoting consumer expectations about the new product before launch, an incumbent has more time to launch and higher probability of dominating its market.     

Third-Degree Price Discrimination in the Presence of Asymmetric Consumption Externalities

In this paper, we consider third-degree price discrimination in two markets in the presence of asymmetric consumption externalities; we establish that under plausible conditions, a firm reduces its price in the market with low price elasticity of demand. The firm can increase its profits by reducing the price for these consumers and enlarging the demand for other consumers, provided that positive consumption externalities exist. Moreover, we show that third-degree price discrimination enhances not only the firm’s profit but also total consumer surplus.

Sarah Elvins. Sales and Celebrations: Retailing and Regional Identity in Western New York State, 1920-1940. Athens, Ohio: Ohio University Press, 2004. 222 pp. ISBN 0-8214-1549-2, $42.95 (cloth).

Elvins’s book is part of a growing body of historicalscholarship that interrogates the lived experience of consumersociety in the twentieth-century United States. Beginning whereWilliam Leach’s Land of Desire (1993) left off, Elvinsseeks to complicate "top-down" narratives of the homogenizationof American consumer culture into a national mass market. Takingher cue from Lizabeth Cohen’s early work on consumptionin Chicago, Elvins examines consumption on the local level in     

Harold James. Family Capitalism: Wendels, Haniels, Falcks, and the Continental European Model. Cambridge, Mass.: Harvard University Press, 2006. xii + 434 pp. ISBN 0-674-02181-9, $39.95 (paper).

In recent years, revising or amending Alfred D. Chandler’sthesis on the rise of large-scale business enterprises has becomean industry unto itself. A decade ago, the most significantchallenges to Chandler’s visible hand appeared to comefrom those who espoused both the contemporary and the historicalvirtues of flexible specialization. More recently, it appearsthat advocates of the family firm have begun to stake theirclaim to a part of Chandler’s sizable inheritance. However,just as the introduction of flexibility into the historicalliterature reflected a particular     

Who should practice price discrimination using rebates in an asymmetric duopoly?

Price discrimination is generally thought to improve firm profits by allowing firms to extract more consumer surplus. In competition, however, price discrimination may also be costly to the firm because restrictive incentive compatibility conditions may allow the competing firm to gain market share at the discriminating firm’s expense. Therefore, with asymmetric competition, it may be the case that one firm would let the other firm assume the burden of price discrimination. We investigate optimal segmentation in a market with two asymmetric firms and two heterogeneous consumer segments that differ in the importance of price and product attributes. In particular, we investigate second-degree price discrimination under competition with explicit incentive compatibility constraints thus extending prior work in marketing and economics. Focusing on the managerial implications, we explore whether it would be profitable for either or both firms to pursue a segmentation strategy using rebates as a mechanism. We identify conditions under which one or both firms would want to pursue such segmentation. We find that segmentation lessens competition for the less price-sensitive consumer segment and that this results in higher profits to both firms. A key to understanding this result is that segmentation leads to consumer remixing. We establish the key result that if firms are asymmetric in their attractiveness to consumers, the disadvantaged firm in our model is more likely to pursue a segmentation strategy than its rival in equilibrium. We then ask whether this result prevails in practice. To this end, we explore competitive segmentation empirically and are able to verify that disadvantaged firms indeed pursue segmentation through rebates with greater likelihood.     

Challenging the Loss of an Empire: González & Byass of Jerez

After the loss of the Spanish American markets, Spanish entrepreneurs faced considerable challenges in order to penetrate or consolidate European markets. Sherry exporting was one of their most successful responses. Very few entrepreneurs controlled this business, and most of them were non-Spaniards. The exception was Manuel María González Angel, founder of González & Byass. This firm became the leading sherry export company of Jerez in the second half of the nineteenth century. This article studies two strategies that explain the success of this firm: the organisation of partnerships with Spanish and British entrepreneurs, and the continuous adoption of technical innovation in production and distribution.     

Consumer Perceptions of the Antecedents and Consequences of Corporate Social Responsibility

Perceptions of a firm’s stance on corporate social responsibility (CSR) are influenced by its corporate marketing efforts including branding, reputation building, and communications. The current research examines CSR from the consumer’s perspective, focusing on antecedents and consequences of perceived CSR. The findings strongly support the fact that particular cues, namely perceived financial performance and perceived quality of ethics statements, influence perceived CSR which in turn impacts perceptions of corporate reputation, consumer trust, and loyalty. Both consumer trust and loyalty were also found to reduce the perceived risk that consumers experience in buying and using products. From these significant findings, we draw several conclusions and implications, including the importance of enhancing firm focus toward its ethical commitment and long-term reputation.     

Creative mass. Consumption,creativity and innovation on Bangkok's fashion markets

The becoming productive of consumer culture has been an important theme for social research. Within neoliberal discourse, the link between consumer culture and new forms of immaterial production has been conceptualized as “creativity.” This paper uses the experience of Bangkok's fashion markets to begin to articulate an alternative understanding of the relation between consumer culture and immaterial production, a different kind of “creativity.” We suggest that Bangkok's fashion markets manifest a kind of creativity where innovation is highly socialized, as opposed to being oriented around the notion of individual genius and individual intellectual property; where participation is popular as opposed to elite-based and where the ambiguous relation between creation and commercial success that is intrinsic to Western notions of creativity is replaced by an embrace of markets and commerce as vehicles for self-expression. Bangkok's fashion markets represent an example of a market-based commons centered innovation economy.     

The Transformation of Boral: From Dependent,Specialist Bitumen Refiner to Major Building Products Manufacturer

This essay explores the route by which Boral transformed itself from being a small firm operating in a niche within the petroleum industry to its current position as one of the largest manufacturers of building products in Australia. Boral's exit from the oil industry was largely influenced by the declining attractiveness of that market as a result of a more competitive environment. The direction of its subsequent voyage across industry and market boundaries was set by the exploitation of firm specific knowledge and competencies. Boral's bold leaps into apparently unrelated new industries represented the transfer of a core set of capabilities into new markets. Boral acquired new skills which augmented its competencies and it was able to use them to gain a competitive advantage in a wide range of related markets.     

Firm resources,cultural distance and simultaneous international expansion in the retail sector

Despite the fact that many firms simultaneously expand into multiple new markets, we know very little about why firms choose this type of international expansion instead of sequentially entering new markets. Drawing on the resource-based view (RBV) we argue that in order to engage in simultaneous international expansion firms have to be able to draw on intangible assets, be financially strong, and have international experience that will enable them to reduce and/or shoulder the strains on managerial resources, time compression diseconomies and costs of simultaneously entering multiple new overseas markets. We further expect the strength of these associations to be moderated by the cultural distance between a firm’s home country and newly entered countries. Our analysis of the international expansion of the sales operations of 102 retailers over the period 2003–2012, during which these retailers sequentially or simultaneously entered into a total 836 overseas markets, largely supports our hypotheses. Our study underlines the usefulness of the RBV for understanding simultaneous international expansion as an important phenomenon that has received only scant scholarly attention to date.     

Strategic partnerships and the internationalisation process of software SMEs

This research investigates the nature of strategic partnering activities of software SMEs (small-to-medium-sized enterprises), their motivations to engage in strategic partnerships as part of the internationalisation process, the key benefits achieved and the main challenges encountered. It explores managers’ perceptions of partnership activities through a qualitative research methodology focussing on Irish indigenous firms. Findings suggest that strategic partnerships were initiated to take advantage of firm synergy, reputation and credibility advantages. Partnerships also served as an important foreign market entry mechanism allowing firms to accelerate sales cycles and reduce risk in overseas markets. Challenges facing firms included partner selection and issues of control. Directions for further research are highlighted.     

Export performance of small firms from small countries: The case of New Zealand

Drawing on traditional models of multinational expansion and organisational learning, Brouthers et al. (J Int Mark 17:21–38, 2009) prescribe that in some circumstances, small firms exporting from small countries should concentrate their exports into a single overseas market. These particular circumstances pertain to small Greek and Caribbean exporters in mature low-technology industries. This research extends this 2009 study to the same size group of small firms in another small country, New Zealand. Model estimation involved multiple regression methods on survey data from 249 small New Zealand exporters. Contrasting with Brouthers et al.’s advice, this study finds that small New Zealand exporters should not concentrate their exports into one or a few overseas markets. Success for these small firms stemmed from higher rates of R&D expenditure and multi-market exporting through company-owned channels in distant markets. These differences reflect the different environments and sample characteristics between the two studies. The paper contextualises further the evidence base on the strategies that small firm owner-managers should pursue and policy makers should promote.     

Leveraging uncertainty through backorder

Business models based on postponement are being increasingly adopted by firms in categories ranging from consumer electronics and information technology to automobiles. Backorder is one example of this system wherein firm produces the product after receiving an order from the customer and they represent a stark contrast to the traditional Make-to-stock (MTS) system where firm anticipates demand and satisfies it from finished inventory. The popularity of postponement is primarily attributed to the operational efficiencies that it can generate for a firm in dealing with highly uncertain and dynamic demand environments. Our focus in this paper is on understanding the implications of the interaction of demand uncertainty and consumer heterogeneity for the optimality of these different systems. We show that the combination of these two forces requires the firm to use both backorder and MTS simultaneously. The optimality of backorder depends on the extent of demand uncertainty—products that exhibit relatively higher demand volatility are better candidates for backorder. Importantly, the combination of the two systems has significant implications for the firm’s product line decision (in terms of product qualities) and pricing.     

H. Roger Grant. "Follow the Flag": A History of the Wabash Railroad Company. DeKalb: Northern Illinois University Press, 2004. xii + 291 pp. ISBN 0-87580-328-8, $49.95 (cloth).

"Follow the Flag" reaffirms Roger Grant’s status as oneof the preeminent historians of transportation in the UnitedStates. The book reflects the predilection of many railroadhistorians to focus on a specific firm, rather than addresslarger thematic issues. Far more than being "just another railroad,"however, the Wabash reflected changes in its political, economic,and social milieu, while also playing a leading role in shapingthe very environment that surrounded it. The Wabash rose from the ashes of an 1830s Illinois internal     

Learning from exporting: The moderating effect of technological capabilities

There is evidence that exporters are more productive than non-exporters. Scholars argue that exporters may have access to knowledge spillovers in foreign markets and use this knowledge to become more efficient. However, we know little about whether learning from exporting is affected by firms’ heterogeneous resource endowments and, particularly, about the specific firm characteristics that matter the most in this respect. Utilizing a sample of 1534 Spanish manufacturing firms from 1990 to 2002, we empirically analyze whether a firm's technological capabilities (proxied by its relative R&D expenditures) affect its ability to learn from the interaction with foreign agents. We find that firm productivity increases after exporting for all firms. However, ex post productivity improvements are larger for the more technologically advanced firms than they are for their less technologically advanced counterparts. Our results show that some firms stand to benefit more from exporting than others and hint at the importance of absorptive capacity for knowledge acquisition overseas.