Optimal pricing for information goods with piracy and saturation effect

We analyze the pricing decision of a firm selling a product for which there is a significant and continuous saturation effect over time and that can be pirated. Assuming that the firm uses a skimming strategy, we solve three profit maximization models, given demand that is linearly decreasing in price. Few prices can be used over the life of the product. The effects of both piracy and saturation are combined in the first model. In the second model, the firm can invest in technology or copyright enforcement to reduce piracy. The third model describes the case in which piracy leads to increased awareness of the product and increased demand. Numerical sensitivity analysis and examples are used to illustrate the results. The results indicate that under strong piracy and saturation effects, a skimming strategy is suboptimal.     

“Bricks vs. Clicks”: The impact of manufacturer encroachment with a dealer leasing and selling of durable goods

In durable goods markets, many brand name manufacturers, including IBM, HP, Epson, and Lenovo, have adopted dual-channel supply chains to market their products. There is scant literature, however, addressing the product durability and its impact on players’ optimal strategies in a dual-channel supply chain. To fill this void, we consider a two-period dual-channel model in which a manufacturer sells a durable product directly through both a manufacturer-owned e-channel and an independent dealer who adopts a mix of selling and leasing to consumers. Our results show that the manufacturer begins encroaching into the market in Period 1, but the dealer starts withdrawing from the retail channel in Period 2. Moreover, as the direct selling cost decreases, the equilibrium quantities and wholesale prices become quite angular and often nonmonotonic. Among other results, we find that both the dealer and the supply chain may benefit from the manufacturer’s encroachment. Our results also indicate that both the market structure and the nature of competition have an important impact on the player’s (dealer’s) optimal choice of leasing and selling.     

The impact of digital channel distribution on the experience goods industry

We explore the impact of a digital channel for experience goods on the profitability and behavior of players in the supply chain and on piracy. We consider a firm which can sell an experience good in physical form, in digitized form, or both. We analyze different pricing schemes – price for whole album on the retail channel and linear and nonlinear pricing for songs on the digital channel. Consumers are divided into a retail-captive segment whose consumers are limited to the retail channel and a hybrid segment whose consumers have access to both retail and digital channels.     

Optimal Advertising and Pricing in a New-Product Adoption Model

A model of new-product adoption is proposed that incorporates price and advertising effects. An optimal control problem that uses the model as its dynamics is solved explicitly to obtain the optimal price and advertising effort over time. The model has a great potential to be used in obtaining solutions and insights in a variety of differential game settings. The authors thank Anshuman Chutani for help with the figures.     

The diffusion dynamics of choice: From durable goods markets to fashion first names

Goods, styles, ideologies are adopted by society through various mechanisms. In particular, adoption driven by innovation is extensively studied by marketing economics. Mathematical models are currently used to forecast sales of innovative goods. Inspired by the theory of diffusion processes developed for marketing economics, we propose a modelling framework for the mechanism of fashion, which we apply to first names. Analyses of French, Dutch, and US national databases validate our modelling approach for thousands of first names, covering, on average, more than 50% of the yearly incidence in each database. In these cases, it is thus possible to study how first names become popular and when they run out of fashion. Furthermore, we uncover a clear distinction between popularity and fashion: less popular names, typically not included in studies of fashion, may be driven by fashion, as well. © 2016 The Authors Complexity Published byWiley Periodicals, Inc. Complexity 21: 362–369, 2016     

The effects of advertising,prices and distribution on market share volatility

Although the influence of marketing decision variables on market share has received ample attention in the literature, less is known about their effects on volatility. This study attempts to shed light on this issue by empirically examining the effects of advertising, pricing and distribution, not only on market share but also on its volatility, using an EGARCH model. We argue that establishing a link between management-controlled actions, such as advertising, pricing and distribution, and market share volatility may benefit firms seeking to reduce uncertainty in their market share performance. Application of the proposed model to data on two markets (SUVs and Minivans), suggested that advertising, pricing and distribution significantly influence market share volatility.     

The implications of costs, capacity, and competition on product line selection

We consider a situation in which a manufacturer has to select the product(s) to sell as well as the selling price and production quantity of each selected product. There are two substitutable products in the consideration set, where product 2 has a higher quality and reservation price than that of product 1. By considering the cannibalization effect that depends on the selling price of each product, the manufacturer needs to evaluate the profit function associated with three different product line options: sell both products or only one of the 2 products. In order to examine the impact of costs, capacity, and competition on the optimal product line selection, optimal price, and optimal production quantity analytically, we present a stylized model in this paper so that we can determine the conditions under which a particular option is optimal.     

Pricing and market segmentation using opaque selling mechanisms

In opaque selling certain characteristics of the product or service are hidden from the consumer until after purchase, transforming a differentiated good into somewhat of a commodity. Opaque selling has become popular in service pricing as it allows firms to sell their differentiated products at higher prices to regular brand loyal customers while simultaneously selling to non-loyal customers at discounted prices. We develop a stylized model of consumer choice that illustrates the role of opaque selling in market segmentation. We model a firm selling a product via three selling channels: a regular full information channel, an opaque posted price channel and an opaque bidding channel where consumers specify the price they are willing to pay. We illustrate the segmentation created by opaque selling as well as compare optimal revenues and prices for sellers using regular full information channels with those using opaque selling mechanisms in conjunction with regular channels. We also study the segmentation and policy changes induced by capacity constraints.     

聚类分析在品牌市场定位研究中的应用

利用统计技术对顾客感知质量和感知价格进行市场定位可以解决品牌市场定位中存在的一些问题。文章利用系统和迭代聚类分析对中国耐用消费品进行了市场定位实证研究,利用方差分析和交叉列表分析检验聚类的有效性并获得聚类的特性,利用多重对应分析进一步研究类别特征。结果显示,聚类具有有效性,中国耐用消费品品牌定位呈现十字型。最后文章提出一种市场定位研究的组合统计技术。     

Customization competition between branded firms: Continuous extension of product line from core product

We study a competition of product customization between two branded firms by a game-theoretic approach. Firms produce products with two attributes: one attribute indicates a characteristic with regard to “function” or “design” of a product and the other indicates “taste” or “flavor” of the product, which reflects consumers’ brand/taste preferences. Two branded firms have their own specific core products and our customization is defined as a continuous extension of their product line from the core product only along the “function” attribute. In particular, we allow asymmetric positions of core products, which may create the position advantage/disadvantage between firms. We suppose that consumers incur their selection costs with regard to finding their most favorable item among a rich variety of products and firms incur their customizing costs with regard to extending their product lines. We first show that in the equilibrium, branded firms should fundamentally adopt their customizations to cover the center space in the market as far as possible, regardless of the position of the competitor’s core product. Therefore, the position of the core product contributes to the creation of a competitive advantage: when one firm’s core product is located more closely to the center of the market than the competitor’s, its customization can always cover more range of the center space in the market, while keeping its degree of customization smaller than the competitor’s. Furthermore, we show some implications of unit-cost improvement: in a short run, a firm is better off concentrating on the improvement of the unit selection cost rather than the unit customizing cost. In contrast, in a long run, both firms can benefit from the improvement of the unit customizing cost.     

Dynamic pricing of electricity in retail markets

This paper aims at defining a dynamic and flexible tariff structure for a distribution company that protects the retail consumers against the excessive fluctuations of the wholesales market prices. We propose a two-stage pricing scheme that sets in a first-stage a time-of-use tariff that is corrected later by a dynamic component once the real-time demand has been observed. A personalized tariff scheme may be offered by a distribution company to each dynamic customer by allowing him to choose the appropriate robustness level expressed in terms of variability between the first and the second-stage decisions. The arising limited recourse model has been tested on realistic test problems, by using a slight modification of a recently proposed interior point solution framework.      

Basics of electricity derivative pricing in competitive markets

This paper studies the application of the available financial theory to the deregulated electricity market. The special characteristics of electricity make the market different from all other commodity markets. The paper introduces a coherent framework for the assets and instruments in the electricity markets in the financial tradition. Properties of the instruments that are available in the Scandinavian electricity market are studied in more detail.     

Product line selection and pricing analysis: Impact of genetic relaxations

A model for the product line selection and pricing problem (PLSP) is presented andthree solution procedures based on a genetic algorithm are developed to analyze the results based on consumer preference patterns. Since the PLSP model is nonlinear and integer, two of the solution procedures use genetic encoding to “relax” the NP hard model. The relaxations result in linear integer and shortest path models for the fitness evaluation which are solved using branch and bound and labeling algorithms, respectively. Performance of the quality of solutions generated by the procedures is evaluated for various problem sizes and customer preference structures. The results show that the genetic relaxations provide efficient and effective solution methodologies for the problem, when compared to the pure artificial intelligence technique of genetic search. The impact of the preference structure on the product line and the managerial implications of the solution characteristics generated by the genetic relaxations are also discussed. The models can be used to explicitly consider tradeoffs between marketing and operations concerns in designing a product line.     

Optimization and analysis of the profitability of tariff structures with two-part tariffs

Service providers often offer tariff structures with several two-part tariffs that consist of a fixed fee and a usage price, such that consumers may pick the tariff they prefer. Prices of tariffs have significant impacts on service providers’ profit, because they simultaneously influence consumers’ tariff choices and their usage. The number of tariffs also plays an important role, because more tariffs segment the market better but also increase the administrative burden and require more marketing effort. This article presents a mixed-integer nonlinear programming optimization problem to determine profit-maximizing tariffs; compares several heuristic search methods, in particular, the gradient method, stochastic search, and simulated annealing, to solve this problem; analyses the profitability of different tariff structures; and outlines the factors that drive differences in profitability across various tariff structures. The results show that especially for large samples of more than 100 consumers, simulated annealing performs best and deviates only 0.2% from the optimum. Structures with fewer two-part tariffs are generally sufficient, because additional two-part tariffs only negligibly increase service providers’ profit.     

Periodicity of pricing and marketing efforts in a distribution channel

Most research about cooperative (coop) advertising programs in channels relies on the assumption that manufacturers and retailers decide of pricing and marketing efforts simultaneously. This paper evaluates this central assumption and investigates the optimal periodicity (sequence of move) of pricing and marketing efforts (ME) decisions for a distribution channel. We develop a game theoretic model that accounts for pricing at each level of the channel, for the manufacturer’s ME mix strategies (a direct ME to consumers and coop advertising program offered to the retailer) and the retailer’s ME as well. We obtain solutions for a bilateral channel under different vertical interaction scenarios; when the channel is led by the manufacturer, the retailer or when channel members decide simultaneously of each of their marketing mix decisions (vertical Nash). We compare the effect of pricing and ME decision periodicity on outputs for each channel member. The main findings suggest that simultaneous decision-making of pricing and ME is optimal only for high enough levels of the manufacturer’s ME effects. For very highly effective marketing efforts, sequential play of pricing and ME allows channel members to implement equilibrium strategies and achieve maximum profits that would not be achieved with simultaneous decision-making. This highlights the importance of relaxing the simultaneous play assumption of pricing and ME in a distribution channel.     

Pricing and Advertising of Private and National Brands in a Dynamic Marketing Channel

We consider a marketing channel where a retailer sells, along the manufacturer’s brand, its own store brand. We assume that each player invests in advertising in order to build the brand’s goodwill. One distinctive feature of this paper is the introduction of the negative effect of own advertising on other player’s goodwill stock evolution. We characterize feedback-Nash pricing and advertising strategies and assess the impact of the store brand and national brand’s goodwill stocks on these strategies in different settings. The main findings suggest first that investing in building up some equity for each brand reduces the price competition between them and propels the market power for both. Second, the retailer will pass to consumer an increase in its purchasing cost of the national brand in all situations as no coordination is taken into account to counter the double marginalization problem. Finally, the higher the brand equity of the store brand, the more the retailer invests in advertising.     

Sensitivity analysis of markup equilibria in complementary markets

We study the competitive structure of a market in which firms compete to provide various products within a bundle. Firms adopt price functions proportional to their per-unit costs by selecting markups. We consider two measures reflecting, respectively, the intensity of direct competition and the impact of complementarity on each producer’s markup. We characterize the sensitivity of these terms to various changes in the market structure and relate this to changes in producer profits and the social efficiency of the market.     

Optimization of component reliability in the design phase of capital goods

We introduce a quantitative model to support the decision on the reliability level of a critical component during its design. We consider an OEM who is responsible for the availability of its systems in the field through service contracts. Upon a failure of a critical part in a system during the exploitation phase, the failed part is replaced by a ready-for-use part from a spare parts inventory. In an out-of-stock situation, a costly emergency procedure is applied. The reliability levels and spare parts inventory levels of the critical components are the two main factors that determine the downtime and corresponding costs of the systems. These two levels are decision variables in our model. We formulate the portions of Life Cycle Costs (LCC) which are affected by a component’s reliability and its spare parts inventory level. These costs consist of design costs, production costs, and maintenance and downtime costs in the exploitation phase. We conduct exact analysis and provide an efficient optimization algorithm. We provide managerial insights through a numerical experiment which is based on real-life data.     

Convention evolution in organizations and markets

Conventions are essential for the coordination of multi-agent systems. However, in many systems conventions can not be legislated in advance and need to emerge during the system's activity. As designers of such systems we may wish to ensure that conventions will evolve rapidly. Given a classical model for convention evolution where agents tend to mimic agents they interact with, the designer can control the organizational structure of the system in order to speedup the evolution of conventions. This paper introduces a study of convention evolution in the context of basic organizational structures. Our study sheds light on a basic aspect of organizational design which has not been discussed in the literature, and which is crucial for efficient design of non-trivial multi-agent systems.