Download - “Preview Provision under Competition”
“Preview Provision under Competition”
Yi Xiang and David SobermanApril 2012
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1. Introduction2. Literature Review3. Objectives of the Analysis4. The Model Structure5. The Analysis and Findings6. Conclusion
Agenda
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Motivation◦ Based on a hypothetical couple◦ Based on real newspapers in the Toronto area◦ Based on the information these papers contained
April 30, 2009 The Basic Question and the Context for its
relevance
Introduction
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AnecdoteJohn is a law clerk who works downtown Toronto, and Sarah, his wife is a hospital administrator. They each buy a newspaper everymorning on their way to work. The day is April 30th, 2009 and onthe previous evening and this morning, John and Sarah discussed howswine flu was going to affect Sarah's work at the hospital. Inparticular, the conversation focused on Sarah's ability to get homein time to meet the children after school. On their way into thesubway, both Sarah and John make their choice between twonewspapers, the `Toronto Sun' and the `Globe and Mail', which theyview in the newsstand. Sarah is interested in learning more about the spread of swine fluand is curious about how this will affect her family's life over thenext few days. On the other hand, John has heard more than enoughabout swine flu (in fact, it was all Sarah wanted to talk about). Tostart his day, he wants to read about other things.
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There are many different layouts for newspapers as shown in the attached pictures
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Here’s what John and Sarah saw at the newsstand.
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Here’s what John and Sarah saw on the newsstand.
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The Sun’s format makes it clear that there is significant information about Swine flu inside◦ 9 stories inside about Swine flu◦ More than 3 full pages of stories◦ The front page clearly indicates where to find the stories
The Globe’s format makes it more difficult to find out what is inside. There is a story on Swine flu but◦ Only 3 stories about Swine flu◦ Only one page (total) of stories on Swine flu◦ The front page does not indicate where to find the
stories
Key Observations
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From the story, it seems John would choose the Globe and Sarah the Sun.
It also seems that the format and the information provided to the consumer (before buying) had a significant impact on consumer choice.
A news provider can choose a format that provides a very precise indication of what is inside
A news provider does not have complete control of the information that is generated each day
Interpretation
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Previews for products can take many forms◦ The front page of many publications◦ Previews aired several hours before a programme
is scheduled to air◦ Early descriptions of product characteristics for
products like wine and whisky◦ The packaging of many products which describes
what is inside
The Basic Question
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For many products the preview is an important ingredient to consumer decision making.
Marketers can design previews to be either1. Highly informative of the product
characteristics.2. Generic previews that do not necessarily
indicate the unique characteristics of the product.
The Basic Question cont’d
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The Basic Question cont’d
versus
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There are some categories where the marketer does not have complete control of the product attributes.◦ They are generated by a random process of some kind◦ This is not the norm: generally marketers do have control of
the product attributes. Categories where this seems to apply include
◦ News products (magazines, newspapers, news reports on TV and/or radio)
◦ Chateau bottled wine where the weather and nature have a significant impact on each year’s vintage.
◦ Ski resorts where the weather has a significant effect on the quality of skiing that patrons will encounter
◦ Resorts (near national parks) e.g. Denali or Kruger, regarding the types of animals that will be present on a tour
The Basic Question cont’d
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When firms design previews for their products (that can communicate positioning) and do not fully control product positioning, will they choose to provide informative or uninformative previews?
Will the choice depend on the degree of competition experienced by the firm?
Will the choice depend on the timing of the game?
In a nutshell
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The timing of the game◦ Preview design, pricing, positioning revealed
Daily newspapers◦ Preview design, positioning revealed, pricing
Less frequent informative publications◦ Positioning revealed, preview design, pricing
Previews of wine that is ready to bring to market This also will serve as a useful test of the
robustness of the findings
In a nutshell
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Related to the literature on media competition◦ Coase (1974), Besley and Prat (2006), Stromberg
(2001)◦ Compete based on the accuracy and
informativeness of news Related to the literature on news as an
entertainment good◦ Gabszewicz et al (2001), Hamilton (2003), Xiang
and Sarvary (2007)◦ Positioning, slanting, media bias
2. Literature Review
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Related to the literature on informative advertising◦ Butters (1977), Grossman and Shapiro (1984),
Robert and Stahl II (1993)◦ People only buy if they are informed about the
position Related to the literature on information
revelation◦ Jovanovic 1982, Shavell 1994, Chen and Xie 2005◦ Information revelation is strategic and depends on
nature
2. Literature Review
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2. Literature Review
How clearly do I let consumersknow what is inside?(Information revelation)Consumer have
preferences for certain stories(Media is entertainment)
Media Competition
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2.Literature Review
How clearly do I let consumersknow what is inside?(Information revelation)
The Preview lets the consumer know about the position but does not activate the consumer(Informative Advertising)
Media Competition
Consumer have preferences for certain stories(Media is entertainment)
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In a market where product positioning is determined by an exogenous random process, will a monopolist choose to communicate its precise location through a preview?◦ Does it depend on whether the monopolist sets price
before the position is revealed or after? In a market where product positioning is
determined by an exogenous random process, will competitors choose to communicate precise location through previews?
What is the equilibrium preview design outcome under competition?
3. Objectives of the analysis
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How are firm profits affected by preview design strategy?◦ Do firms lose or gain by having the capability to
provide informative previews. Will the results of the analysis change if
◦ Prices can be set after the revelation of positions instead of before
◦ Product design strategy can be chosen after the revelation of product positions
3. Objectives of the analysis
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One or two firms compete in a linear market where products can be positioned from (0,1)
Consumer are uniformly distributed along the market in terms of their preference for positions.
4. Model Structure
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4. Model Structure
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Consumers incur a benefit (associated with their ideal news story) less the travel cost (due to the story not being ideal) less the price charged by the firm.
Consumers decide whether individual rationality is satisfied:◦ CS=v-td-p>0 where v is the benefit for an ideal news
story, t is the travel cost, d is the distance from the consumer to the position of the news story, and p is the price charged
When there are two firms, the consumer chooses the product that provides the most surplus
4. Model structure
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The timing of the game1. The firm chooses a preview strategy2. The firm sets price3. The firm receives a random draw from the
market4. Consumers make a decision which product to
buy and profits are realized.
4. Model structure
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1. The Firm chooses a preview strategy◦ The firm chooses q ε (0,1). When q=0, the preview is
uninformative. When q=1, the preview is perfectly informative.
◦ The base model considers a binary choice q=0,1 with zero cost for either choice
We later examine continuous q and the impact that costs might have on the outcomes
◦ An uninformative preview can be thought of as a generic message about the category that does not provide details on the product attributes
◦ This is akin to choosing the front page style. Does it quickly and clearly communicate to the potential buyer (within 5 sec) what is inside?
4. Model Structure
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2. The Firm sets price.◦ The firm sets a price for its product knowing its
own preview strategy◦ When the firm has a competitor it knows the
preview strategy employed by its competitor (these are both long term decisions) when it sets price.
◦ The price is posted and consumers are informed of the price when they make a decision.
◦ The profit of firms is the product of demand and the price charged (the cost of the product is normalized to zero for all firms)
4. Model Structure
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3. The firm receives a random draw from the market
◦ Nature generates a random draw from the market
◦ When there are two firms, the draws are independent.
◦ The position (chosen by nature) is transmitted (or not) by the preview to potential buyers
4. Model Structure
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Admittedly, for the news category, the same world generates news content but
◦ Newspapers have journalists in different places generating different content
◦ The managing editor needs to make choices about which stories will receive top emphasis
This choice is made without knowing what content will be emphasized by the competitor
4. Model Structure
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4. Consumers make a decision which product to buy and profits are realized.
Based on the expected location of the product and its price, each consumer assesses the utility of the alternatives
Monopoly: buy or not buy Duopoly: buy from Firm 1,buy from Firm 2, not buy
When the preview is informative, the consumer knows the location. When the preview is uninformative, the consumer forms expectations about the content
The consumer is aware of the distribution that generates content and knows her own preferences.
4. Model Structure
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◦ Consider a situation where q=0 (uninformative) or 1 (informative). When the timing is Preview design, pricing, positioning
revealed The monopolist earns when the preview is
uninformative When the preview is informative, the monopolist sets
p= when to earn profits of
p=v-t when v>3t to earn profits of v-t These profits are strictly less than the profits earned by
being uninformative. The monopolist does not gain by providing an informative
preview.
5. The Analysis and Findings
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◦ Preview design, positioning revealed, pricing Less frequent informative publications
The monopolist earns when the preview is uninformative
When the preview is informative, the monopolist sets p=v-ty when y<½ and p=v-t(1-y) when y>½ to earn
profits v-ty or v-t(1+y). The expected profits are with a maximum profit of
These profits are strictly less than the profits earned by being uninformative.
The monopolist does not gain by providing an informative preview
5. The Analysis and Findings
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Intuition◦ When a firm does not face competition, its
objective is to be as optimally located as possible i.e. y=½.
◦ This allows it to charge the highest price possible and still satisfy the individual rationality constraint of all consumers.
◦ The expected location without previews is the optimal location for a monopolist and this is precisely why she does not have an incentive to inform consumers about her location.
5. The Analysis and Findings
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When the timing is Preview design, pricing, positioning revealed, what happens when firms face competition? The products are perceived to be homogenous without previews
Bertrand competition leads to profits of zero When one firm chooses an informative preview, it earns an expected
profit of
This is clearly better than zero. The competitor however, earns an expected profit of
In a nutshell, uninformative previews cannot be an equilibrium Interestingly, a firm’s decision to implement informative previews
conveys a positive externality on the competitor.
5. The Analysis and Findings
.288169 t
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When both firms choose informative previews◦ The products are now perceived to be different◦ The firm set prices in order to maximise profit
given the expected distance between the firms◦ Firm profits are t/2. ◦ This implies that the discrete game has an
asymmetric outcome where one firm chooses to provide informative previews and the other does not
5. The Analysis and Findings
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5. The Analysis and Findings
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Do the findings change when the timing is different i.e. Preview design, positioning revealed, pricing The profits earned when previews are uninformative do
not change Products appear undifferentiated so profits are zero
When one firm provides informative previews and the other does not then the firm with informative previews earns and the competitor earns
When both firms implement informative previews the profits of each firm are
5. The Analysis and Findings
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5. The Analysis and Findings
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uninformative informative
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Firm 2
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The findings are unaffected by the timing though firms that utilize informative previews are more profitable◦ Being able to set price after position is revealed
allows firms to manage competition more effectively◦ Nevertheless, the findings are unambiguous.
One firm will implement informative previews to reduce competition
The other firm has no incentive to reciprocate. Once a competitor makes its position clear. The expected position of y=½ is preferred to the actual position The best response to a competitor with informative previews
is to utilize uninformative previews.
5. The Analysis and Findings
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Are these findings due to the discrete nature of the base model i.e. q=0 or 1.
What happens if we allow q to be continuous for both firms?◦ Will firms choose an intermediate level of preview
precision (and hence lead to a symmetric equilibrium) or will an asymmetric outcome survive?
◦ What are the precise characteristics of the asymmetric outcome?
5. The Analysis and Findings
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The challenge with this problem is that there are there are multiple cases that need to be solved◦ qi=0 and qj∈ (0,1)◦ qi=1 and qj∈ (0,1)◦ qi ∈ (0,1) and qj∈ (0,1)
Already solved in the simple case◦ qi=0 and qj=1◦ qi=0 and qj=0◦ qi=1 and qj=1
5. The Analysis and Findings
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For each firm when qj∈ (0,1), we assume that a fraction q are informed and a fraction 1-q are uninformed.◦ This means that when qj∈ (0,1) for i=1,2, we have
four groups of consumers uniformly spread along the market Fully informed, D1: q1q2 Informed about the location of 1, not 2, D2: q1 (1-q2) Informed about the location of 2, not 1, D3: q2 (1-q1) Uninformed about both firms, D4: (1-q1 )(1-q2)
5. The Analysis and Findings
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From this we construct the objective functions for both firms:
These are optimized simultaneously with respect to p1 and p2 which means that for each pair of q1 and q2 we can find the optimal prices
We then work backward to determine the optimal choice of q for each firm
5. The Analysis and Findings
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When q1>>q2
A pure strategy equilibrium in prices results and the calculations are straightforward
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When q1 is only somewhat larger than q2
A mixed strategy equilibrium in prices results and the calculations are complicated
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The equilibrium is for one firm to provide informative previews and the other firm to provide uninformative previews◦ When the cost to increase q is 0, the equilibrium outcome is
qi=0 and qj=1◦ When the cost of to increase q is positive then the
equilibrium outcome is is qi=0 and qj>0◦ This underlines the general finding that
The decision of one firm to provide informative previews releases firms from a Bertrand trap
The competitor benefits even more than the focal firm when the focal firm provides informative previews
The competitor has no incentive to respond by creating informative previews of its own
5. The Analysis and Findings
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We also examine the third alternative in terms of timing◦ Positioning revealed, preview decision, pricing◦ A wine producer decides on the “amount of
information” to be provided in its preview◦ In France, this may amount to a decision of
whether to list on sites such as http://blog.midi-vin.com and/or www.bienmanger.com
5. The Analysis and Findings
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The findings here are similar◦ At least one firm has an incentive to provide an
informative preview◦ The best response of the competitor is to provide
an uninformative preview◦ Perhaps this explains why less than 50% of the
registered vineyards in the Midi-Provence region of France are listed on http://blog.midi-vin.com
5. The Analysis and Findings
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We have examined the question of preview provision in a context where product positioning is not in the control of the producer
The optimal policies are affected by the degree of competition◦ Monopolists do not have an incentive to provide
informative previews A key assumption is that the preferences of consumers
are evenly distributed across the range of products that the monopolist can provide
◦ In contrast competition creates a strong incentive to utilize informative previews.
6. Conclusion
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When one firm implements informative previews, the competitor has no incentive to reciprocate with the same strategy
The decision to implement an informative preview confers a strong positive effect on the competitor.
The decision to implement an informative preview effectively gifts half the market to the competitor.
Symmetric preview strategies should not be observed
These findings are robust to alternate timings and continuous decisions about preview precision
6. Conclusion
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Limitations◦ In this model, previews only affect how consumer choose
between products. They have no effect on the creation of primary demand
◦ The model may have limited application to a market where consumers make long term commitments to products (like subscriptions). Here previews may play a different role.
◦ When repeat purchasing is important, the consumption experience is generally part of product evaluation. Our model implicitly assumes that the consumption experience of the two products is equal.
◦ In the news market, many factors may contribute to the quality of the consumption experience including product design. Our model does not account for this.
6. Conclusion