The multichannel pricing dilemma: Do consumers accept higher offline than online prices?

Whether to unify or discriminate prices in offline and online channels is a controversial topic that can be central to whether offline retailers survive in the marketplace. Field data evidence from a large multichannel retailer reveals a sobering picture. On average, only offline price premiums of approximately 2% seem feasible, and such premiums vary largely by product categories and price levels. High-priced products, which consumers perceive as risky, tend to allow offline price premiums, as do low-priced, takeaway items. However, in between these two extremes, the results show no potential for offline price premiums. Drawing on price fairness theory, we further explore consumer responses to higher offline prices in three experimental studies. In contrast with the assumptions of price fairness theory, the provision of purchase advisory services and communication of the price motive hardly stimulate consumer acceptance of higher offline prices in our context. However, the findings reveal important heterogeneity in consumer responses depending on their market segment, because some market segments indeed respond less negatively to higher offline prices. In addition, consumers accept offline price premiums for unplanned purchases.     

How do firms make money selling digital goods online?

We review research on revenue models used by online firms who offer digital goods. Such goods are non-rival, have near zero marginal cost of production and distribution, low marginal cost of consumer search, and low transaction costs. Additionally, firms can easily observe and measure consumer behavior. We start by asking what consumers can offer in exchange for digital goods. We suggest that consumers can offer their money, personal information, or time. Firms, in turn, can generate revenue by selling digital content, brokering consumer information, or showing advertising. We discuss the firm’s trade-off in choosing between the different revenue streams, such as offering paid content or free content while relying on advertising revenues. We then turn to specific challenges firms face when choosing a revenue model based on either content, information, or advertising. Additionally, we discuss nascent revenue models that combine different revenue streams such as crowdfunding (content and information) or blogs (information and advertising). We conclude with a discussion of opportunities for future research including implications for firms’ revenue models from the increasing importance of the mobile Internet.     

For Love or Money? Fairtrade Business Models in the UK Supermarket Sector

This article analyzes the distribution of benefits from Fair Trade between producing and consuming countries. Fair Trade and conventional coffee production and trade were examined in Nicaragua in 2005–2006 and 2008. Consumption of the respective coffees was assessed in Finland in 2006–2009. The results indicate that consumers paid considerably more for Fair Trade-certified coffee than for the other alternatives available. Although Fair Trade provided price premiums to producer organizations, a larger share of the retail prices remained in the consuming country relative to conventional coffee trade. Paradoxically, along with the certified farmers and cooperatives, Fair Trade empowers roasters and retailers.     

Consumer price awareness in food shopping: the case of quantity surcharges

Quantity surcharges, higher unit prices on larger sizes than smaller sizes, are often found among grocery items. In this study we consider the question of why consumers buy surcharged goods. We hypothesize that it is the consequence of a failure to price search, and that some buyers purchase larger sizes in the belief they are cheaper, thus avoiding the need for price comparisons. In the analysis we examine canned tuna, using 1990 data from 54 grocery regions on sales, prices, and consumer demographics. Results support the hypothesis. We find evidence that buyers of surcharged items are mainly those with high time and information costs.     

Return freight strategies and selling formats in e-commerce supply chain: The perspective of consumer fairness concerns and online shopping returns

Returns and consumer fairness concerns put a huge pressure on manufacturers who sell their products online. The optimal selling format and return freight strategy become particularly important for manufacturers in an e-commerce supply chain. Therefore, we build game models for the following scenarios under different selling formats: the seller bearing the return freight costs or the return-freight insurance premiums, consumers buying insurance for themselves, and no one buying insurance. By comparing the optimal solutions of the game models under reselling and agency formats, several conclusions are derived. In the agency format, if the return-freight insurance premium is higher than a particular threshold, then the optimal strategy of the manufacturer is to decrease the selling price to encourage consumers to purchase the insurance, otherwise, the manufacturer should purchase the insurance. As the level of consumer fairness concerns and platform commission rates increase, the manufacturer should gradually move from the agency to reselling format. In the reselling format, if the return-freight insurance premium is lower than a particular threshold, then consumers will purchase insurance and this will make the platform more profitable, and conversely, the platform should bear the return freight costs.     

Livestock Revenue Insurance

This study outlines several possible structures for livestock revenue insurance. The policies take the form of an exotic option, an Asian basket option. The actuarially fair premiums for these policies are equal to the prices of the options they represent. Because of the complexity of pricing Asian basket options, we combined two techniques for pricing options to reach the actuarially fair premiums. Projected premiums, producer welfare, and program efficiency are evaluated for the insurance products and existing market tools. Using efficiency ratios and certainty equivalent returns, we compare the insurance policies to strategies involving existing futures and options. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:553–580, 2001     

Verbraucherschutz im Bereich der Versicherung — das schwedische Konsumentenversicherungsgesetz

Zusammenfassung Das neue schwedische Konsumentenversicherungsgesetz soll Versicherungsbedingungen bewirken, die den Bedürfnissen der Verbraucher besser entsprechen. Zeitliche Kontinuität des Versicherungsschutzes auch bei Erneuerung der Versicherung und vor der Prämienzahlung gehören zu den Interessen, die dabei im Vordergrund stehen. Auch bei Obliegenheitsverletzungen soll der Versicherungsschutz beibehalten werden, soweit dies mit den Interessen der Versicherungswirtschaft in Einklang zu bringen ist.

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Consumer protection in the field of insurance — The new Swedish Consumer Insurance Act

This article gives a survey of a new Swedish statute on insurance contracts with consumers. The scope of the Act is limited to the branches that are most important to consumers, such as household or homeowner insurance and motor insurance. It leaves aside life insurance and other insurance of persons, for which legislation is to follow later.The object of the Act is described as being to facilitate the conducting of insurance business in a suitable manner, paying regard to the needs of consumers as insured. The consumers are to have legal rights against the insurers, so as not to depend largely on the insurers' good will. Competition between insurers should also be encouraged.The Act contains a number of — technically rather complicated — rules that aim at safeguarding the continuity of the insurance protection. An underlying assumption is that a gap in the validity of an insurance, because of failure to renew the insurance contract, can be fatal to a person insured if damage occurs during that period. There are, therefore, rules regarding automatic renewal. The interest of the insured in being able to change the insurance, or move to another insurer, is protected principally by a rule that the maximum period of contract is normally one year.The wish to safeguard the unbroken continuity of an insurance contract is also reflected in the rules relating to payment of premiums. The insured is to have adequate time for payment after receiving notice. He shall not lose the insurance protection even temporarily — which would leave him without indemnity if damage occurred during that time — unless he has received two successive notices of payment. The second notice is to be a cancellation of the insurance contract, since the insurer shall not be entitled to a premium for a period during which he has not been at risk.The rules regarding failure of the insured to comply with duties regarding disclosure, warranties, etc., are based on the idea that total loss of the right to the insurance indemnity may be detrimental for the types of insurance that the statute concerns. An insured who has acted without fault shall always be entitled to full insurance indemnity, and even if he has been at fault, the consequence should as far as possible be only a reduction of the insurance indemnity, not total loss of it. However, the need for a sanction against fault varies considerably for different branches of insurance, and the rules therefore give considerable leeway for adapting the insurance conditions to the various situations.It is mentioned that the statute has already given rise to considerable discussion in Sweden. On the one hand, the insurers maintain that the statute will lead to increased premiums, mainly because of the amount of protection that is given to those who are careless. On the other hand, the proponents of the statute argue that in fact the rules of the statute mostly agree with the present practice of the insurers and should therefore not give rise to any appreciable increases of premiums.

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Jan Hellner ist Professor für Rechtswissenschaft an der Universität Stockholm, S-106 91 Stockholm, Schweden.     

A Micromodel of New Product Adoption with Heterogeneous and Forward-Looking Consumers: Application to the Digital Camera Category

We develop an empirical model for the adoption process of a new durable product that accounts for consumer heterogeneity as well as consumers forward-looking behavior. Accounting for heterogeneity is important for two reasons. As the mix of consumers with different preferences and price sensitivities could change over time, firms need to update their marketing strategies. Further, it allows for a variety of shapes for the aggregate adoption process over time. As prices for durable and technology products fall over time with firms continually introducing enhanced products, consumers may anticipate these prices and improvements and delay their purchases in the product category. Forward-looking consumers optimize purchase timing by trading off their utilities from buying the product and their expectations on future prices, quality levels, and brand availability. Such forward-looking behavior will result in price dynamics in the marketplace as price changes today influence future purchases. And it results in different shapes of the new product sales pattern over time by influencing the time to take-off. We show how the parameters of our model can be estimated using aggregate data on the sales, prices, and attributes of brands in a product category. We apply our model to market data from the digital camera category. Our data are consistent with the presence of both heterogeneity and forward looking behavior among consumers. At the product category level, we are able to decompose the effects of the entry of Sony into primary demand expansion and switching from other brands. At the brand level, we find that there exist several segments in the market with different preferences for the brands and different price sensitivities leading to differences in adoption timing and brand choice across segments. For a given brand, we show how the changing customer mix over time has implications for that brands pricing strategies. We characterize how price effects vary across brands and over time and how price changes in a given time period influence sales in subsequent periods. Model comparison and validation results are also provided.     

Informative Brand Advertising and Pricing Strategies in Internet Markets with Heterogeneous Consumer Search

The use of information intermediaries has been shown to undermine the effect of brand in online markets. In this paper, the effect of consumer search on the relationship between brand advertising and pricing strategies is analysed. Price data are taken from the leading UK motor insurance comparison website, with the advantage that prices can be related to the search characteristics of consumers and to the advertising expenditure of firms. The paper finds that more-advertised firms have lower price rankings at the comparison site, indicating that advertising is informative in this market. The main result is that consumer search weakens the relationship between advertising and pricing. An implication is that increased usage of price comparison sites will make informative brand advertising less important.     

Investigating the unobserved heterogeneity in consumers’ sensitivity to the price of gasoline

We empirically examined how gasoline prices impact consumers’ shopping behaviors. Using individual panel data on gasoline transactions, we found that gasoline prices generally have a statistically and economically significant impact. However, our disaggregate analysis indicated that, across consumers, considerable heterogeneity was present in the underlying sensitivity to the price of gasoline and in the income effect, resulting from fluctuating gasoline prices. More interestingly, the significant effect of gasoline prices was largely driven by the consumers with large purchase volume, and consumers with the highest level of gasoline consumption remained almost perfectly insensitive to the price of gasoline. Such heterogeneity is also present in the effect of gasoline prices on grocery expenditures, and notably, consumers with the largest purchase volume were not associated with statistically significant changes in grocery expenditures. Theoretical background suggests that the financial constraints of consumers and primary vehicle use may explain about the differences in responses to gasoline prices. Results based on individual-level data allowed for a comprehensive understanding of how and how much gasoline prices affect consumer behaviors and showed that inelastic gasoline demand and the considerable income effect due to gasoline prices may not best describe the effect of gasoline prices.     

Examining Determinants of Foreign Wage Premiums in China

We estimate foreign wage premiums for every 3‐digit manufacturing industry in China and discover a wide range of premiums both for ‘foreign’ ownership and for overseas Chinese ownership. Foreign ownership generates larger and more prevalent wage premiums than overseas Chinese ownership, but both produce premiums that respond similarly in estimates of determinants. Using the number of computers per worker to measure firms' technology levels, we find evidence consistent with the hypothesis that foreign firms pay higher wages to reduce the risk of worker turnover and the accompanying technology leakage in 76 to 78 per cent of industries. However, this determinant explains only 5 to 6 per cent of the foreign wage premium. We find the most intensive support for the ‘fair wage’ hypothesis that foreign firms pay higher wages because they are more profitable than domestic firms and workers in more profitable firms expect to be paid more, otherwise they will shirk. This hypothesis explains an average of 8 to 9 per cent of the foreign wage premiums, with support found in 72 to 75 per cent of the industries. When we consider the best combination of explanatory variables to include in each industry's wage regression, we find evidence consistent with our combined hypotheses in most industries, but we still find large residual foreign wage premiums.     

Protecting Consumers From Uninsured Motorists: An Alternative Financing Mechanism

For over 65 years, state legislators have debated how consumers who have been injured by financially irresponsible motorists will be compensated. While uninsured motorists insurance has become the modal choice among several states, responsible motorists in most states must completely pay for this coverage themselves. Motorists who drive without liability insurance contribute virtually nothing to meeting the costs of accidents they cause. This paper proposes that premiums for basic limits of uninsured motorists coverage be collected by a small universal motor fuel surcharge. These state-collected premiums then would be distributed to insurers on the basis of the number of vehicles that they insure within the jurisdiction. It is proffered that this mechanism is both more equitable and significantly lower in cost for the average motorist than the various present mechanisms of financing uninsured motorists coverage.     

Are consumers heterogeneous in their preferences for odd and even prices? Findings from a choice-based conjoint study

While marketing theories provide some justification for the common practice of setting 9-ending prices, the results of empirical studies are not conclusive on the effects of odd pricing. Nearly all empirical studies have been conducted at the aggregate consumer level, thereby implicitly assuming that consumers respond to odd prices homogeneously. In this research, we analyze consumers' preferences for 9-ending versus 0-ending prices at the individual level. Our findings suggest that some consumers strongly prefer 9-ending prices, whereas other consumers favor 0-ending prices. We further address the existence of level effects and investigate the influence of consumer characteristics on preferences for odd prices.     

Some implications of search and switching costs for the price dynamics of electronic markets

This article develops a model, based on switching costs and technological uncertainty, which explains some aspects of the price dynamics of e‐commerce. Switching costs and intertemporal cost correlation lock‐in consumers. Firms initially charge low prices to build a customer base. If firms fail to reduce costs, and reservation prices are low, firms exit the industry. Over time, prices increase if no exit occurs, and decrease if exit occurs. Prices may also decrease over time, if the proportion of low search cost consumers increases.     

Consumer willingness to pay across retail channels

Published research examining differences in consumer willingness to pay for products at omnichannel and pure-play online retailers is based on non-durable, search products and is equivocal; prices at pure-play online retailers are not always lower. This research examines differences in consumer willingness to pay for online purchases of functional and expressive products that differ in the length of product life, i.e. durable and nondurables at omnichannel versus pure play online retailers. Empirical analysis of consumer-centric, multi-site clickstream data of prices paid show that consumers are willing to pay higher prices for home goods products at omnichannel retailers compared to pure-play online retailers but differ for functional and expressive products. Implications are drawn to assist both omnichannel and PPO retailers in their pricing strategies.     

Something Free or Something Off? A Comparative Study of the Purchase Effects of Premiums and Price Cuts

As an alternative to promotional price cuts, retailers and manufacturers often rely on non-price promotion techniques, such as premium promotions, where consumers receive a free gift with the purchase of a product. We compare the effectiveness of premiums to that of price cuts, and study moderators of this comparative premium effectiveness. We use data from a large online shopping simulation study with more than 2,000 participants to model consumers’ purchase decisions in response to premiums and price cuts. Results indicate that the impact of premiums on purchase behavior is systematically lower than that of equivalent price cuts. However, a premium’s smaller sales impact may be offset by a cost advantage. This is especially true for private label brands where the premium’s purchase effects do not differ too much from those of a price cut. We calculate how large the cost advantage has to be for a premium to be more profitable than a price cut, and show that premiums entail risks as well as opportunities, for both manufacturers and retailers.     

On the evolution of monopoly pricing in Internet-assisted search markets

This study examines the evolution of prices in markets with Internet price-comparison search engines. The empirical study analyzes laboratory data of prices available to informed consumers, for two industry sizes and two conditions on the sample (complete and incomplete). Distributions are typically bimodal. One of the two modes of distribution, corresponding to monopoly pricing, tends to attract such pricing strategies increasingly over time. The second one, corresponding to interior pricing, follows a decreasing trend. Monopoly pricing can serve as a means of insurance against more competitive (but riskier) behavior. In fact, experimental subjects who initially earn low profits due to interior pricing are more likely to switch to monopoly pricing than subjects who experience good returns from the start.     

Price Awareness and Consumers’ Use of Deals in Brand Choice

There is evidence that consumer knowledge of prices is limited, implying that, on occasions, consumers may not be fully informed of prices when making a brand purchase. On such occasions, how do consumers make their brand choice decision? One possibility is that consumers use their expectation of prices. This raises an interesting question. To what extent is brand purchase either a function of preferences and posted prices or, of preferences and expectation of brand prices? Another important issue relates to the role of displays and features in simplifying consumer brand choice. First, do promotions cause consumers to restrict their attention to only promoted brands? Second, do promotions affect the price aware consumers more than the price unaware consumers? Our study uses scanner data on ketchup and peanut butter categories to answer the foregoing questions. We find that between 40 and 50% of the purchases are made by consumers using expectations of prices rather than posted prices. Consumers using price expectations may be thought of as being “unaware” of prices. We also find that promotions cause some consumers to focus exclusively on promoted brands, and this effect is greater on the price aware consumers than on the price unaware consumers. Our findings have an important bearing on the rationality of consumer expectation of prices, especially of the promoted brands. Price aware consumers act as a check against firms promoting without accompanying price cuts.     

Culture, product type, and price influences on consumer purchase intention to buy personalized products online

With personalization, consumers can choose from various product attributes and a customized product is assembled based on their preferences. Marketers often offer personalization on websites. This paper investigates consumer purchase intentions toward personalized products in an online selling situation.The research builds and tests three hypotheses: (1) intention to purchase personalized products will be affected by individualism, uncertainty avoidance, power distance, and masculinity dimensions of a national culture; (2) consumers will be more likely to buy personalized search products than experience products; and (3) intention to buy a personalized product will not be influenced by price premiums up to some level. Results indicate that individualism is the only culture dimension to have a significant effect on purchase intention. Product type and individualism by price interaction also have a significant effect, whereas price does not. Major findings and implications are discussed.     

The impact of a captive insurance company's formation on a firm's value after the carnation case

One of the primary reasons previously cited for forming a captive insurance company is tax advantages based on premium deductibility. The IRS ruling in the Carnation Company case was the first time that investors experienced a decisive legal action signaling the possibility that premiums paid to captives might not be tax deductible to the parent company. The purpose of this paper is to determine if the investor's perceived lack of tax deductibility of premiums, based upon the Carnation case, has an impact upon the parent firm's value at time of captive formation. The results indicate that the market placed a high value on the ability of the parent company to deduct for tax purposes the insurance premium paid to its captive. Before the Carnation case there was a positive reaction by the market to captive formation whereas after the Carnation case, there was a negative reaction.