Information Goods
Li, X., Wang, X., & Nault, B. R. (2023). Is Personalized Pricing Profitable When Firms Can Differentiate?. Management Science, Published Online 18 Aug 2023. doi: 10.1287/mnsc.2021.02740 PDF (last version of working paper)
We consider the role of personalized pricing (PP) on product differentiation when PP is costly to implement. Employing a stylized yet commonly-used formulation, we find that when firms decide on positioning before deciding on PP implementation, PP implementation cost affects not only the amount of differentiation firms choose in their positioning, firm profits, consumer surplus, and social welfare, but also whether firms imple- ment PP. When PP implementation cost is low, firms cannot help but to implement PP and engage in direct price competition. Moreover, firms implementing PP reduce their differentiation, further intensifying price competition, and are worse off. When PP implementation cost is moderate, firms position to reduce their dif- ferentiation to commit to not implementing PP, again aggravating price competition. In contrast, when PP implementation cost is higher, firms increase their differentiation due to the threat of PP but do not implement PP. As a result, the availability of PP improves firm profits, even though firms do not implement PP. However, if differentiation is restricted, then PP availability cannot improve firm profits. If an information seller sets the PP implementation cost, then it sets the cost low. Consequently, firms implement PP and are worse off. We also find that when firms decide whether to implement PP before deciding on positioning, they never implement PP. This is the case when PP implementation is complex and differentiation can be affected by short-run adver- tising and promotion. Finally, we show that banning PP can benefit consumers when accounting for changes in firm positioning.
Nault, B. R., & Rahman, M. S. (2019). Proximity to a traditional physical store: The effects of mitigating online disutility costs. Production and Operations Management, 28(4), 1033-1051. doi: 10.1111/poms.12957 PDF (open access paper) Appendix
We examine the implications of proximity to a physical store in offline-online retail competi- tion where online disutility costs, which encompasses factors such as trust in the seller, returns, and after-sales support, are important. Building on classical models, we consider a traditional retailer’s expansion online, benefitting from the physical store’s presence in serving customers online. Our innovation is to allow online disutility costs to be mitigated if the purchase is from a dual-channel retailer, defining the mitigation as a function of proximity to the traditional store. Although expansion online is rarely profitable for traditional retailers, the expanded presence increases consumer welfare – which is further increased by competition from a pure e-tailer. However, the competition between a pure e-tailer and dual-channel retailers can lower social welfare: in aggregate consumers may incur greater online disutility costs than transportation costs to obtain lower prices online. When online disutility costs are high and no pure e-tailer is present, dual-channel retailer prices and profits, in traditional stores and online, are greater than those where the market only has physical stores and a pure e-tailer. Furthermore, consumer welfare is lower. Thus, consumers benefit from an expanded presence of traditional retailers on- line only when online disutility costs are low enough that mitigation matters. If online disutility costs are low, then their mitigation can result in higher social welfare in a market with only dual-channel retailers. Similarly, the mitigation of online disutility costs can result in higher social welfare when dual-channel retailers and a pure e-tailer coexist.
Zimmermann, S., Herrmann, P., Kundisch, D., & Nault, B. R. (2018). Decomposing the variance of consumer ratings and the impact on price and demand. Information Systems Research, 29(4), 984-1002. doi: 10.1287/isre.2017.0764 PDF (last version of working paper)
Consumer ratings play a decisive role in purchases by online shoppers. Although the effect of the average and the number of consumer ratings on future product pricing and demand have been studied with some conclusive results, the effects of the variance of these ratings are less well understood. We develop a model where we decompose the variance of consumer ratings in two sources: taste differences about search and experience attributes of a durable good, and quality differences among instances of this good in the form of product failure. We find that (i) optimal price increases and demand decreases in variance caused by taste differences, (ii) optimal price and demand decrease in variance caused by quality differences, and (iii) when holding the average rating as well as the total variance constant, for products with low total variance both price and demand increase in the relative share of variance caused by taste differences. Counter to intuition, we demonstrate that risk averse consumers may prefer a higher priced product with a higher variance in ratings when deciding between two similar products with the same average rating.
Koh, B., Raghunathan, S., & Nault, B. R. (2017). Is voluntary profiling welfare enhancing?. MIS Quarterly, 41(1), 23-42. doi: 10.25300/misq/2017/41.1.02 PDF (last version of working paper)
Although consumer profiling advocates tout benefits from personalization, consumer advocacy groups oppose profiling in online markets because of concerns about privacy and price discrimination. Policies such as “opt-out” or “opt-in” that provide consumers the option to voluntarily participate in profiling are the favored compromise. We compare voluntary profiling to no profiling and show that voluntary profiling leads to some counter-intuitive results. Consumers that do not participate in profiling and some that participate are worse off under voluntary profiling. Neither social welfare nor aggregate consumer surplus is necessarily higher under voluntary profiling; even when voluntary profiling leads to an increase in social welfare, it may come at the expense of consumer surplus. If the seller cannot price discriminate and charge only a uniform price for everyone or the seller can only charge different prices based on the consumers participation status, then aggregate consumer surplus under voluntary profiling is higher and a reduction in privacy cost has a positive impact on all consumers as well as the seller. However, when personalized pricing is possible, reducing privacy cost alone may reduce aggregate consumer surplus. The primary reason for these results is that voluntary profiling allows the seller to identify high valuation consumers that have no incentive to participate and set a higher price for them (compared to no profiling) while simultaneously benefitting from the profile information of low valuation consumers that participate. However, a positive privacy cost mitigates the participation incentives of even low valuation consumers and hence sellers’ ability to engage in price discrimination.
Wei, X., & Nault, B. R. (2014). Monopoly versioning of information goods when consumers have group tastes. Production and Operations Management, 23(6), 1067-1081. doi: 10.1111/poms.12180 (Author Posting. © Production and Operations Management Society2013. This is the author's version of the work. It is posted here by permission of Production and Operations Management Society for personal use, not for redistribution. The definitive version was published in Production and Operations Management, 23, 6,1067–1081.) PDF (last version of working paper)
Large sunk costs of development, negligible costs of reproduction and distribution resulting in economies of scale distinguish information goods from physical goods. Versioning is a way firms may take advantage of these properties. However, in a baseline model where consumers differ in their tastes for quality, an information goods monopolist only offers one version, and this differs from what we observe in practice. We explore formulations that add features to the baseline model that result in a monopolist offering multiple versions. We examine versioning where consumers differ in individual tastes for quality, and groups of consumers that share the same group taste are delineated by segments of individual tastes. We find that if groups have mutually exclusive characteristics – a horizontal dimension – that they value relative to the shared characteristics, then versioning is optimal. Consequently, any horizontal differentiation in product line design favors versioning. In addition, when group tastes are hierarchical such that higher taste groups value characteristics that lower taste groups value but not vice versa – a vertical dimension, as long as the valuations of the higher and adjacent lower taste group are sufficiently close, then versioning is also optimal. Our conditions, which also help determine how many versions are optimal, are based on exogenously defined parameters so that it is feasible to check them in practice.
Cottrell, T., & Nault, B. R. (2004). Product variety and firm survival in the microcomputer software industry. Strategic Management Journal, 25(10), 1005-1025.doi: 10.1002/smj.408 ( This is the pre-peer reviewed version of the following article: Cottrell, T., and Nault, B.R., "Product Variety and Firm Survival in the Microcomputer Software Industry," Strategic Management Journal 25, 10 (October 2004), 1005-1026., which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1002/smj.408/abstract.) PDF (last version of working paper)
This paper provides an analysis of product variety and scope economies in the microcomputer software industry by using detailed firm-level and product-level information on firms’ bundling of functionalites over application categories and computing platforms. We find that the management of product variety through the way different application categories are integrated in products and the platforms on which these products are offered can be as important as the significance of scope economies at the more aggregated firm level. Specifically, we find that there is little evidence of firm benefits from economies of scope in production, but there is substantial evidence that products benefit from economies of scope in consumption. In addition, we find that firms with products that encapsulate more application categories perform better, and those with products that cover more computing platforms perform worse. Finally, changes in product variety through new product introductions improve firm performance, but extensions to existing products hinder the performance of the firm and the product. We conclude that research in scope economies can benefit from a more detailed model of the evolution of product variety that includes data and analysis at the firm level and at the product level.