Experiments on strategic choices and markets

Much of experimental research in marketing has focused on individual choices. Yet in many contexts, the outcomes of one’s choices depend on the choices of others. Furthermore, the results obtained in individual decision making context may not be applicable to these strategic choices. In this paper, we discuss three avenues for further advancing our understanding of strategic choices. First, there is a need to develop theories about how people learn to play strategic games. Second, there is an opportunity to enrich standard economic models of strategic behavior by allowing for different types of bounded rationality and by relaxing assumptions about utility formulation. These new models can help us to more accurately predict strategic choices. Finally, future research can improve marketing practice by designing better mechanisms and validating them using experiments.     

Incorporating Behavioral Anomalies in Strategic Models

Behavioral decision researchers have documented a number of anomalies that seem to run counter to established theories of consumer behavior from microeconomics that are often at the core of analytical models in marketing. A natural question therefore is how equilibrium behavior and strategies would change if models were to incorporate these anomalies in a consistent way. In this paper we identify several important and generalizable anomalies that modelers may want to incorporate in their models. We briefly discuss each phenomenon, identify a key unresolved issue and outline a research agenda to be pursued.     

Strategic Decentralization and Channel Coordination

In this paper, we show that under certain conditions, strategic decentralization through the addition of a retailer in the distribution channel can increase a manufacturer's profits. The specific case on which we focus is the quantity coordination (double marginalization) problem for a manufacturer selling durable goods in a two-period setting. We show that the standard solution that coordinates a channel for non-durables does not coordinate the channel for durables. In particular, even though a manufacturer can achieve channel coordination by offering per-period, two-part fees, the equilibrium wholesale price in the first period is strictly above the manufacturer's marginal cost. This is in stark contrast to the two-part solution for non-durables where the equilibrium wholesale price is equal to marginal cost. We also identify a strategy that solves both the channel coordination and the Coase problem associated with durable goods. In this strategy, at the beginning of period 1, the manufacturer writes a contract with the retailer specifying a fixed fee and wholesale prices covering both periods. We show that by adding a retailer and using this contract, the manufacturer makes higher profits than it could if it were to sell directly to consumers.