Consumer Behavior and Its Strategic Implications for Firm Profit Maximization

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This dissertation studies a variety of consumer behaviors and their strategic implications for firm profit maximization. The first chapter discusses how bundle pricing (via shipping policies) allows firms to achieve higher profits than component pricing when consumers's tastes for products are correlated. The second chapter illustrates how durable good producers could benefit from the existence of secondary markets, despite the fact that secondary markets create competition between new and used goods. The third chapter demonstrates how pre-announcing sales might have negative impacts on retailer's profitability due to consumer purchase-timing behavior. The first chapter studies how multi-product firms price combinations of their products. At one extreme, firms can set prices for individual products only ("component pricing"). At the other extreme, firms can set prices for all possible bundles of their products ("mixed bundling'"). While mixed bundling, in theory, gives the first-best level of profits, firms usually implement relatively simple pricing schemes in practice. Using data from a Chinese online book retailer that implements a contingent free shipping policy - the retailer charges a flat shipping fee per order and waives it for orders over a certain threshold - I empirically examine the effectiveness of simple pricing schemes in extracting consumer surplus. I find that component pricing captures 81.9 percent of the profits from mixed bundling, and a contingent free shipping policy allows the retailer to capture an additional 70.7 percent of the profit difference between component pricing and mixed bundling. This provides one possible explanation for the relatively simple pricing structures observed in practice - that they are nearly as effective a means of price discrimination as mixed bundling. The second chapter discusses two countervailing effects of secondary markets on the profitability of durable good producers: while secondary markets create competition between new and used goods, they also raise the value of new goods by facilitating resale. Exactly how the secondary market functions affects the relative strength of these forces, and therefore whether a durable goods producer will gain or lose from closing the secondary market. We investigate these ideas empirically in the context of college textbooks. Using the estimates of a dynamic structural model of student and publisher behavior, we find that, depending on the mechanism determining used book prices, publishers can but do not always benefit from closing the secondary market. The last chapter examines temporary price reductions (i.e., sales), during which the quantity sold is unsurprisingly higher than during non-sale periods. I examine pre-promotion consumer purchasing behavior to show how consumers time-shift their purchases when learning about upcoming promotions. Using data from a Chinese online book retailer, I find that promotion announcements reduce daily book sales by 74.7 percent during pre-promotion periods. Such prominent purchase deceleration implies that part of the demand increase during sales is due to intertemporal substitution. I also find that the sales increases during promotions are often fully offset by the sales decreases during pre-promotion periods. These results suggest that, since consumers strategically withhold their purchases in anticipation of promotions, it might not be profitable for retailers to pre-announce promotions.

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  • 02/20/2018
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