Managerial Incentives and Durable Goods Monopoly

In many cases durable goods monopolists who sell out output do not appear to act in the competitive fashion suggested by Coase (1972). This indicates the firm‘s owners mitigate their commitment problem with buyers in some manner. This paper shows that managerial incentives provide a natural mechanism for the owner to mitigate its commitment problem without explicitly contracting with buyers. Owners will optimally shift their managers from the singular goal of profit maximization by penalizing them for sales. Additionally, the paper demonstrates that the degree to which managerial incentives and compensation diverge from pure profit maximization is in large part a function of the durability or quality of the product.     

Durable Goods and Switching Costs

A simple two–period switching cost model is developed and analyzed assuming durable output. The analysis indicates that many of the conventional managerial implications of the switching cost literature need not hold if products are durable. In particular, the model indicates that managers of durable goods firms that lease or rent output may wish to decrease their customer base (provide service to only a subset of the experienced customers) in future periods, in contrast to the non–durable goods case where the number of customers served is the same. Moreover, the model shows that the optimal behavior of sellers of durable products depends critically upon their commitment ability with buyers, and outlines the conditions under which a manager selling output may rationally expand their customer base (i.e. sell to new customers in a future period).     

Distribution Channel Decentralization and Strategic Durability Choice

In a simple two‐period setting we examine a decentralized distribution (marketing) channel consisting of an up‐stream durable‐goods manufacturer and down‐stream retailer. The manufacturer sets the wholesale price and the product’s durability while the retailer selects an output level. We show that in this setting, the profit‐maximizing manufacturer unambiguously selects a higher durability than the socially efficient (cost‐minimizing) level in both uncommitted sales and rental markets. We show this ‘reversed planned obsolescence’ result is due to the strategic benefit of durability in this double‐marginalization (double monopoly mark‐up) setting. This is in stark contrast to the usual integrated channel result where the profit‐maximizing manufacturer will select an efficient level of durability in rental markets and an inefficiently low durability in uncommitted sales markets (due to the selling firm’s commitment problem with potential buyers). Intuitively, with a decentralized distribution channel, the manufacturer faces potential commitment problems with both current buyers and its down‐stream retailer. We show, only in cases where both sources of commitment issues are removed (i.e. the manufacturer can credibly commit to both potential buyers and its retailer), will the profit‐maximizing durability choice be socially efficient.     

DURABILITY CHOICE AND THE PIRACY FOR PROFIT OF GOODS

We explore the impact of durable goods piracy in a simple two‐period durability choice setting where an originator faces a future for‐profit pirate that clones or duplicates copies of the durable good. We find that a social planner, as well as a monopoly originator, may well engage in a sort of ‘reversed planned obsolescence’. In other words, they manufacture a product that is more durable than the first‐best cost‐minimizing level, if they cannot directly control the pirate. We show this occurs even in rental or committed sales settings, indicating Swan's market independence result does not hold here.     

Wages,Health Insurance Benefits,and Worker Sorting Under Asymmetric Information

Abstract

Employer-sponsored health insurance is the single largest source of health insurance in the USA. In this paper, we explore a model that treats a firm as a de facto insurance company. More specifically, we model a firm as both a producer of goods for an output market and a health insurance company for their employees. The model accounts for the joint provision of wages and health insurance, including the possibility of asymmetric information in employee health status. With this structure, a firm can choose to pay their workers in some combination of cash wages and health insurance. We characterize optimal employment contracts and show that the Rothschild–Stiglitz model results under asymmetric information extend to employer provided insurance. We also find that employment-based insurance offers pooling options that are typically not available when insurance is sold as a standalone product, suggesting a stability to employer-based insurance that is not dependent on the tax system.     

Used goods, not used bads: Profitable secondary market sales for a durable goods channel

The existing literature on channel coordination typically models markets where used goods are not sold, or are sold outside the standard channel. However, retailers routinely sell used goods for a profit in markets like textbooks. Further, such markets are characterized by a renewable consumer population over time, rather than the static consumer population often assumed in prior literature. We show that accounting for these market characteristics alters the optimal contract form as compared to the contracts derived in prior research. In particular, when new goods are sold in both the first and second periods of our model, the optimal contract differs from those in prior literature in that it can exhibit a negative fixed fee in the second period and requires contracting over the resale price in the second period. The model shows that the manufacturer makes higher profits from allowing used-good sales alongside new-good sales than from shutting down the retailer-profitable secondary market, and that unit sales expand with a profitable secondary market over those achievable without a secondary market. Furthermore, in contrast to previous investigations of durable goods markets that ignore the possibility of a retailer-profitable secondary market, we show conditions under which the manufacturer would optimally choose to sell no new goods in the second period, ceding the market entirely to the used-goods retailer. This research thus expands our knowledge of how durable goods markets work by incorporating the profitable operation of a retailer-run resale market.

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Profits and perils in the antiques and collectibles market: the influence of product knowledge structures on dealer exchange outcomes

The secondary market for antiques and collectibles represents a disorganized market channel characterized by competition for supply of rare goods and retail sales arising from non-traditional channels, loose ties among channel members, and largely unregulated transactions between buyers and sellers. This study explores how knowledge structures affect dealers' abilities to turn a profit in the antiques and collectibles market. Data were obtained from in-depth interviews with eight professional antiques and collectibles dealers operating in different regions of the United States. Findings indicate that while information is widespread, its credibility can be difficult to assess without some degree of product and market knowledge. Furthermore, the findings show knowledge plays a critical and somewhat differential role in the ability of professional dealers to turn a profit. Knowledge asymmetries that create favorable conditions for profits when dealers hold the balance of informational power in the upstream acquisition of antiques and collectibles ironically reduce dealers' ability to earn profits in downstream resale of these goods. Findings support a multidimensional view of knowledge as a broader concept, based on information and product and market expertise, but deepened by experiences that lead to tacit knowledge, which can be difficult to transmit.     

Learning by doing,inventory and optimal pricing policy

The notion of the “learning effect” suggests that when a firm introduces a new product, the costs of production will decline as the accumulated output increases. In this paper we analyze this effect on price paths and production rates along time. The distinction between production level and sales level affects the behavior of the firm that can utilize the option of holding inventory. In this case we show that the optimal price increases, even though production costs decrease over time due to “learning by doing.”     

From Fatwallet to eBay: An investigation of online deal-forums and sales promotions

Sales promotions are an important part of retail advertising strategy. Traditionally, research on sales promotions has generally assumed that the buyers are end consumers who do not engage in reselling, in large part due to high transaction costs. However, the recent Internet related technologies have dramatically lowered the cost of transferring goods between consumers, leading to relative ease of reselling activity amongst individual consumers. Little is known about the impact of this phenomenon on retailer's sales promotion strategy. In this research we investigate the reselling activity in online auctions for products that active deal seekers can obtain at deeply discounted prices from retailers. We further investigate the role of deal-forums in the resale process. Data is collected from an online deal-forum (http://www.fatwallet.com/) and eBay to test various reselling-related hypotheses. The results show that there is a significant abnormal increase in the number of newly posted auctions of a product after the deal information of this product is posted on deal-forum website. We also find that there is a significant price incentive for individuals to resell. The implications for sales promotion research and practice are discussed.     

Durable Goods Monopoly and Forward Markets

The existence of forward markets has long been explained by risk hedging behaviour. More recently, attention has focused on the Cournot competition rationale for the emergence of forward markets since the quantity of forward transactions can be used as strategic variable. However, an important facet of many forward markets that has typically been ignored in the literature is the durable nature of output (e.g. nickel and lead). We show that forward markets may optimally emerge as long as a monopolist sells any fraction of its durable output. In particular, the comparative static analysis shows that as the durability of the product increases or the fraction of output sold increases, the monopolist will optimally increase the number of forward contracts purchased due to an exacerbated commitment problem with buyers. Our analysis also provides another explanation for differences between the forward price and the expected future spot price of a commodity that does not rely on uncertainty or risk considerations.     

Innovation,firm size,and firm age

This paper uses a new data set on innovation output to assess the degree to which the level of innovation in manufacturing firms is influenced by firm size and firm age. Indicators of innovation output used are the number of new products introduced as a function of firm sales and the proportion of firm sales obtained from products first introduced in the previous five years. While the evidence is mixed, the results tend to indicate that it is possible to separate the effects of age and size in assessing the level of innovation. Both firm size and firm age tend to be inversely related to innovative output.     

An exploration of the standardization of targeting strategies and the use of promotional disciplines on the web: A cross-national study

This study examines how leading corporations standardize their regional sites from the integrated marketing communication (IMC) perspective. In terms of standardizing targeting strategies, data show that many leading brands view the online audiences as one mass. Customers and media are the two most targeted and standardized stakeholders for all brands and in each of the product categories (i.e. non-durable goods, durable goods, and service). This study also reveals that financial communities/investors, communities, and channel members are the other three most targeted and standardized stakeholders, even though their rankings are somewhat different across the product categories. Employees, government regulators, and special-interest groups are seldom targeted through corporate websites. In terms of standardizing promotional disciplines on the web, advertising is the most standardized, followed by customer relations, direct marketing, public relations, and sales promotions for all brands and each product category. As a whole, service brands have the highest standardization mean, while durable goods rank second and non-durable goods are last. The three product categories do not significantly differ in terms of the standardization of promotional tactics. A Web Standardization Model is developed to be compatible and comparable to Moriarty and Duncan's Standardization Model.     

Foreign Investors' Reaction to Lower Profitability – The Role of Information Asymmetry*

Owners of firms in trouble are more exposed to moral hazard problems than owners of successful firms. Foreign owners who face higher costs to monitor the firm should be more vulnerable to these problems than domestic ones. Consequently, a downward revision in a firm's expected future earnings should push foreign investors to sell their shares to a larger extent than domestic investors. We test this hypothesis on profit warnings issued at the Helsinki Stock Exchange. Our results reveal that in the wake of profit warnings foreign investors will predominantly sell, while domestic investors pick up the net sales by foreigners. Differences in the scale of the foreign investor sell‐out reaction are explained by a number of variables. The most significant one is our proxy for the magnitude of surprise in the warning. The reaction also increases with the degree of perceived information asymmetry for the firm that issued the warning, while foreign members on the firm's board have a moderating impact. By contrast, a number of general corporate governance‐related variables have no statistically significant impact on the reaction.     

Export Versus FDI and the Communication of Complex Information

Traditional proximity-concentration models of the decision to serve foreign markets through exports or FDI sales tend to overemphasize physical transport costs and market size while underemphasizing the cost of transmitting information. I augment those models with the importance of interacting with customers and communicating complex information within firms and use these characteristics to predict the location of production. Goods and services requiring direct communication with consumers are more likely to be produced in the destination market. Activities requiring complex within firm communication are more likely to occur at the multinational's headquarters for export, especially when the destination market has weak institutions. These predictions are tested using firm-level data from the Bureau of Economic Analysis US Direct Investment Abroad Benchmark Survey of Multinationals combined with task-level data from the Department of Labor's Occupational Information Network. The approach developed in this paper performs well for both manufacturing and service industries and is robust to a variety of specifications.     

The fallacy of the heavy buyer: Exploring purchasing frequencies of fresh fruit and vegetable categories

‘Avocado lover,’ ‘banana lover,’ or ‘berry lover’ – these words are starting to dominate the contemporary marketing campaigns for fresh fruit and vegetable categories. Such campaigns assume that there are sizable buyer segments who purchase a particular fresh category more frequently, who are contributing a larger portion of sales, and who will continue to do so into the future. Yet, an established body of empirical evidence from consumer packaged goods (CPG) categories suggests that these assumptions could be false. The current study empirically examines fresh category purchasing behavior (through a large Nielsen US panel data) by applying three known models: the Negative Binomial Distribution, the Pareto share, and the stability over time analysis (buyers and sales contribution). This study compares the results and finds that despite many differences between fresh and CPG categories, buyers' purchasing behavior follows the same established benchmarks patterns as those observed in CPG contexts. There are many more infrequent or light buyers than heavy ‘lovers’; the heavy buyers contribute roughly 60% of sales; they are purchasing less frequently, and contributing fewer sales as time goes by. These findings carry important implications for marketers, retailers, and farmers of fresh categories. Specifically, the results show which marketing campaigns (i.e., those highly targeted at ‘lovers’ or those with a mass marketing appeal) are better grounded in the empirical evidence about buyer behavior which has the highest probability of increasing consumption.     

Electronic Commerce Encourages Differentiation

Abstract

This paper explores why and how ecommerce firms differentiate their products and services. Consumers who shop online are able to do quick and easy comparison shopping, including shopping in an active market for used goods. Since online product search and price comparisons are faster, easier, and involve fewer shopping costs, firms who sell online must differentiate their products and services to a greater extent than those who do not sell online. These product and service differentiations may be certified and rated by host shopping sites and by outside ratings companies.     

Self-Sabotage and Durable-Goods Monopoly

We analyze a simple two-period linear demand durable-goods monopoly model with “self-sabotage.” The firm has the ability to sabotage its own production by increasing its future (period two) manufacturing costs. We find that an uncommitted monopoly seller has an incentive to engage in such self-sabotage, while a committed seller or renter has no such incentive. Unlike the previous papers on self-sabotage, we show this occurs even though the firm faces no rivals in the output market. In our durable-goods setting, the incentive for self-sabotage arises from the seller’s commitment problem with period-one buyers (the so-called Coase conjecture). Interestingly, we also find that this sort of self-sabotage can not only be profit enhancing for the uncommitted firm, but may also increase social welfare (in contrast to the earlier models on self-sabotage.)     

Quality disclosure in the presence of strategic consumers

Consider a market for short-life products, such as smartphones, where a firm and consumers have asymmetric quality information, the firm sells products in two periods, and consumers make purchase decisions strategically. We investigate when a firm should disclose quality and the interaction between consumers' strategic behavior and the firm's disclosure behavior. We obtain several findings. First, regardless of whether consumers have low or high patience, the firm should disclose quality information if product quality is high and conceal it if product quality is low. However, for products with moderate quality levels, the firm will disclose more quality information to consumers with relatively high or low patience levels than when consumer patience is moderate. Second, firms will disclose less information when consumers behave strategically than when they are myopic. Third, when concealing quality information is an equilibrium, product prices are affected only by disclosure costs and independent of true product quality. Finally, the firm can benefit from consumers' strategic behavior and a higher disclosure cost, but greater patience might be detrimental to consumer surplus and social welfare.     

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.     

Hidden costs of consumption

Consumers often underestimate the costs resulting from their consumer decisions. This is especially the case when purchasing durable consumer goods, but also for recreational activities, for which e.g. athletic equipment is bought. A similar situation exists when pets are kept. This disregard for the costs of subsequent use connected with the purchase of household appliances is problematic for consumers. In a study on the usage life of consumer goods¹ in the household, it was recognized that many consumers do not pay attention to these subsequent costs. The decisive consumer problem was not the durability of consumer goods, nor their tendency to become defective, but the resulting costs of the purchase, the operating costs of household appliances. On one hand, the working expenses are not considered at the time of purchase and their effect is not included in the purchase decision. On the other, the operating costs vary greatly, depending on the chosen type and model of appliance and, of course, on the specific form of utilization. In this paper, the question of the durability of consumer goods is first discussed with the help of empirical work. Then the hidden resulting costs, i.e. operating costs or costs of usage of consumer goods, are described. The resulting costs of keeping pets are also discussed. In the final part, the question of objective help for the consumer making purchase decisions is discussed.