Handbook of the Economics of Marketing: Marketing and Economics PDF
Preview Handbook of the Economics of Marketing: Marketing and Economics
Handbook of the Economics of Marketing, Volume 1 Edited by Jean-Pierre Dubé Sigmund E. Edelstone Professor of Marketing University of Chicago Booth School of Business and N.B.E.R. Chicago, IL, United States Peter E. Rossi Anderson School of Management University of California, Los Angeles Los Angeles, CA, United States North-HollandisanimprintofElsevier Radarweg29,POBox211,1000AEAmsterdam,Netherlands TheBoulevard,LangfordLane,Kidlington,OxfordOX51GB,UnitedKingdom Copyright©2019ElsevierB.V.Allrightsreserved. Nopartofthispublicationmaybereproducedortransmittedinanyformorbyanymeans,electronic ormechanical,includingphotocopying,recording,oranyinformationstorageandretrievalsystem, withoutpermissioninwritingfromthepublisher.Detailsonhowtoseekpermission,further informationaboutthePublisher’spermissionspoliciesandourarrangementswithorganizationssuch astheCopyrightClearanceCenterandtheCopyrightLicensingAgency,canbefoundatourwebsite: www.elsevier.com/permissions. 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LibraryofCongressCataloging-in-PublicationData AcatalogrecordforthisbookisavailablefromtheLibraryofCongress BritishLibraryCataloguing-in-PublicationData AcataloguerecordforthisbookisavailablefromtheBritishLibrary ISBN:978-0-444-63759-8 ForinformationonallNorth-Hollandpublications visitourwebsiteathttps://www.elsevier.com/books-and-journals Publisher:ZoeKruze AcquisitionEditor:JasonMitchell EditorialProjectManager:ShellieBryant ProductionProjectManager:JamesSelvam Designer:GregHarris TypesetbyVTeX Contributors GregM.Allenby FisherCollegeofBusiness,OhioStateUniversity,Columbus,OH,UnitedStates EricT.Anderson KelloggSchoolofManagement,NorthwesternUniversity,Evanston,IL, UnitedStates BartJ.Bronnenberg TilburgSchoolofEconomicsandManagement,TilburgUniversity,Tilburg, TheNetherlands CEPR,London,UnitedKingdom Jean-PierreDubé BoothSchoolofBusiness,UniversityofChicago,Chicago,IL,UnitedStates NBER,Cambridge,MA,UnitedStates EdwardJ.Fox CoxSchoolofBusiness,SouthernMethodistUniversity,Dallas,TX,United States AviGoldfarb RotmanSchoolofManagement,UniversityofToronto,Toronto,ON,Canada NBER,Cambridge,MA,UnitedStates RachelGriffith InstituteforFiscalStudiesandUniversityofManchester,Manchester, UnitedKingdom NinoHardt FisherCollegeofBusiness,OhioStateUniversity,Columbus,OH,UnitedStates ElisabethHonka UCLAAndersonSchoolofManagement,LosAngeles,CA,UnitedStates AliHortaçsu UniversityofChicago,Chicago,IL,UnitedStates NBER,Cambridge,MA,UnitedStates SanjogMisra UniversityofChicagoBoothSchoolofBusiness,Chicago,IL,UnitedStates xiii xiv Contributors SridharMoorthy RotmanSchoolofManagement,UniversityofToronto,Toronto,ON,Canada HarikeshS.Nair StanfordGraduateSchoolofBusiness,Stanford,CA,UnitedStates AvivNevo UniversityofPennsylvania,Philadelphia,PA,UnitedStates PeterE.Rossi AndersonSchoolofManagement,UniversityofCaliforniaatLosAngeles, LosAngeles,CA,UnitedStates CatherineTucker MITSloanSchoolofManagement,Cambridge,MA,UnitedStates NBER,Cambridge,MA,UnitedStates MatthijsWildenbeest KelleySchoolofBusiness,IndianaUniversity,Bloomington,IN,UnitedStates Preface This volume is the first in a new Handbook of the Economics of Marketing series. Quantitative marketing is a much younger field than either economics or statistics. Whilesubstantialpartsofourunderstandingofconsumerwelfareanddemandtheory werelaidoutinthelate19thandearly20thcenturies,seriousinquiriesintomodels of consumer behavior in marketing started only in the late 1960s. However, it was really during the past 25–30 years that the access to remarkably detailed, granular customer and seller-level databases generated a take-off in the quantitative market- ingliterature.Theincreasingfocusbythefieldsofempiricalindustrialorganization (I/O)andmacroeconomicsonseveralofthekeythemesinmarketinghashighlighted thecentralroleofmarketinginstitutionstoeconomicoutcomes.Thepurposeofthis handbook is both to chronicle the progress in marketing research as well as to in- troduce researchers in economics to the role of marketing in our understanding of consumerandfirmbehavior,andtoinformpublicpolicy. While marketing and economic researchers share many of the common tools of micro-economics and econometrics, there is a fundamental distinction between the aimsofthetwodisciplines.Mostresearchineconomicsshouldbeviewedaspositive economics,namelythepursuitofexplanationsforgivenmarketingphenomenasuch asthedeterminantsofmarketstructureorthepricingequilibriumprevailingisagiven market.Ontheotherhand,marketingisprimarilyconcernedwiththeevaluationof firmpolicesand,assuch,ismuchmoreofanormativefield.Forexample,amarketing researcher may use the tools of micro-economics to develop models of consumer behavior (demand) but does impose the restriction that firms, necessarily, behave optimallywithrespecttoagivensetofmarketinginstrumentsandinformation.For example, as detailed customer-level data became available, marketing research has focused on how to use these data to developcustomizedadvertisingand promotion of products. Marketing researchers are loath to assume that firms behave optimally withrespecttotheuseofanewsourceofinformation. In the first chapter of this volume,Dubé considers the micro-foundations of de- mand with an emphasis on the challenges created by the much richer and more dis-aggregatedatathataretypicallyavailableinmarketingapplications.Researchers ineconomicshavelongfitmodelsofaggregatedemandandthemodernI/Oliterature emphasizes consistent models of aggregation of individual demands. In marketing, the demand literature has focused on individual, consumer-level drivers of demand startingwiththeaccesstoconsumptiondiarypanelsduringthelate1950s.Withthe advent of detailed household purchase panels during the early 1980s, there was a take-offinmicroeconometricstudiesusingtherecentdevelopmentsinrandomutility basedchoicemodels.However,dis-aggregatedemanddatapresentmanychallenges in demand modeling that stem from discreteness in this data. A substantial compo- nentoftheliteratureseekstoaccommodateaspectsofdiscretenesswhichcannotbe xv xvi Preface accommodatedbythemultinomialmodelsthathavebeenpopularinI/O.Theseas- pects include corner solutions with a mixture of discrete and continuous outcomes andnon-mutuallyexclusivediscreteoutcomes.Marketingresearcherswerealsothe firsttodocumenttheimportanceofunobservableconsumerheterogeneityandpoint outthatthisheterogeneityispervasiveandaffectsjustasubsetofvariables,typically assumed in the empirical I/O literature. Finally, the marketing literature pioneered thestudyofdynamicconsumerchoicebehavioranditsimplicationsfordifferences betweenshort-runandlong-runelasticitiesofdemand. Thedemandsofaworldwithahigh-volumeofdisaggregatedataoninferenceis discussedbyAllenbyandRossiinChapter2.Inaddition,thischapterconsidersthe demands that a normative orientation imposes on inference. Marketing researchers wereearlytoembraceBayesianapproachestoinferencetoadegreestillnotmatched ineconomics.Thecurrentstronginterestinmachinelearningmethodsineconomics isapartialendorsementofBayesianmethods,sincethesehighlyover-parameterized modelsareoftenfitwithBayesianorapproximateBayesianmethodsbecauseofthe superior estimation properties of Bayesian methods. Bayesian methods have made beenadoptedinmarketingprimarilybecauseofthepracticalorientationofmarketing researchers. Researchers in marketing are looking for methods that can work well ratherthansimplydebatingthevalueofaninferenceparadigmintheabstract. While discrete data on demand has proliferated, challenges to valid causal in- ference have also arisen or become accentuated. The classic example of this is a sponsored search advertisement. Here information regarding preferences or interest inaproductcategoryisusedtotriggerthesponsoredsearchad.Clearly,observational datasuffersfromasevereendogeneitybiasasadvertisersareselectingexplicitlyon unobservablepreferences(typicallyinterestinaproductcategory).Thisposesafun- damental inference challenge as all optimality or evaluation of advertising polices requires valid causal inference. Experimentation can provide one approach to ob- taining valid causal estimates but comes with other limitations and challenges as discussedinthechapter. Most economists take the point of view that revealed preference data is to be preferred to stated preference data. While certainly a reasonable point of view, it is somewhat narrow. If we can approximate the purchase environment in a survey context,itispossibletogeneratedatathatmayrisetothevalueofrevealedpreference data. In addition, it is often not possible to find revealed preference data that are sufficiently informative to estimate preferences. For example, many observational datasetshaveverylimitedpricevariationandaresubjecttolegitimateconcernsabout theendogeneityofmarketingvariables,suchasprices.Clearly,prospectiveanalyses of new products or new product features lack revealed preference data. Unique to marketingisthesurveymethodofpreferencemeasurementcalledconjointanalysis. InChapter3,Allenby,Rossi,andHardtdiscusstheeconomicfoundationsofconjoint analysisaswellastheextensiontoconsiderbothdiscreteandcontinuousoutcomes. In much of the economics and marketing literatures, demand is formulated un- der some sort of full information assumption. A classic example is the assumption in nearly all demand applications that prices are known with certainty. If, instead, Preface xvii consumersundertakecostlysearchforpriceorqualityinformation,thenthesesearch frictions must be accommodated in the demand model. Here economics and mar- keting intersect very closely as marketers have always recognized that consumers make choices based on their “consideration sets,” which typically include only a smallsubsetoftheavailableproductsinanygivenmarketorproductcategory.While theoreticalimplicationsofsequentialandsimultaneoussearchhavebeenworkedout in the economics literature, the empirical search literature has only recently taken flightduetoalackofdataonthesearchprocess.Intheonlinecontext,thedataprob- lemhasbeenremovedasbrowsingdatagivesusourfirstcomprehensivemeasureof search. In the off-line context, data are still hard to come by. In Chapter 4, Honka, Hortaçsu,andWildenbeestdiscusstherecentdevelopmentsinthisimportantareaof mutualinterestforbothmarketingandeconomicsempiricalresearch. Inmanymarkets,digitalmediaandtechnologieshavereducedthecostofsearch dramatically.Forexample,consumerscanobtainawealthofinformationregarding car purchases from internet sources without visiting any dealer. In parallel, digital technologies threaten the value of stores as a logistical intermediary, serving as a fundamentalsourceofchangeinmanyindustries.GoldfarbandTuckerdiscussthese trendsandprovideinsightastotheirimplicationsformarketingpracticeandresearch. Inaddition,digitalmediahavefundamentallychangedthewayinwhichmuchadver- tisingisconducted.Advertisersnowhavetheabilitytotriggeradsaswellastotrack, atindividuallevel,theresponsetotheseads.Thisopensmanynewpossibilitiesfor marketingpolicy. MuchofmodernI/Ohasconcentratedontheeconomicmechanismsthatsustain high levels of industry concentration and supra-normal economic oligopoly profits. Oneoftheleadingpuzzlesinthisliteraturehasbeenthepersistenceofconcentration anddominanceinmarketswheretheleadingproductsaredifferentiatedprimarilyby theirbrands.Surprisingly,eventheliteratureonpurecharacteristicsmodelshastypi- callyignoredtheimportantroleofbrandsandbrandingasasourceofproductdiffer- entiation.InChapter6,Bronnenberg,Dubé,andMoorthydiscussbrandingwhichcan beviewedasoneofthemoreimportantsourcesofproductdifferentiation.Marketers havelongrecognizedtheimportanceofbrandsandconsideredvariousmechanisms through which brand preferences are developed on the demand side. The primary source of economic value to many firms is their brand equity and, accordingly, the authorsalsoconsiderthereturnsonbrandingtofirmvalueonthesupplyside. At least since the 1960s, quantitative marketing has been interested in the life- cycleregularitiesofproductsastheydiffusefromlaunchtomaturity.Thediffusion typically focuses on the dynamics of consumer adoption. While the early literature workedmostlywithdescriptivemodels,therecentliteraturehasadoptedastructural approachthatstartswithmicroeconomicfoundationstoanalyzetheconsumer-driven mechanismsthatshapeaproduct’sdiffusionovertime.InChapter7,Nairconsiders theintersectionoftheeconomicsandmarketingliteraturesregardingthedynamicsof consumeradoptiondecisions,onthedemandside.Thechapteralsostudiesthecor- respondingsupply-sidedynamicsoffirms’marketingdecisions(e.g.,entry,pricing, advertising)tocontrolthediffusionoftheirproductsovertime.Herethecombination xviii Preface ofdataandempiricalmethodsfortheestimationofdynamicmodelshasprovideda newempiricalcompaniontothetheoreticalresultsintheeconomicsliterature. Inmanyimportantmarkets, theprimaryinterfacebetweenthefirmandthecus- tomer is the salesforce. The activities of the salesforce represent the single largest marketing expenditure for many firms. In markets for drugs and medical devices, theseactivitieshavecomeunderpublicscrutinyaspotentiallywastefulorevendis- torting of demand. The role of the salesforce is considered in Chapter 8. Misra reviewsthecontractingproblemwhichistheprimarycontributionoftheeconomics literature to this area. Recent empirical work in sales force compensation has em- phasizeddynamicconsiderationsnot present in the classical economicscontracting literature. Overthelastfewdecades,USmanufacturershaveincreasinglyallocatedmoreof theirmarketingbudgetsawayfromtraditionaladvertisingtowardpricepromotions, typicallypaidtodownstreamtradepartnerswhohandlethere-saletoend-usercon- sumers. In consumer goods alone, annual trade promotion spending is estimated to be over $500 billion. Trade promotion funds are intended to induce temporary dis- countsonshelfprices,orsales,thatrepresentoneofthekeysourcesofpricevariation overtimeinmanyconsumergoodsmarkets.Surprisingly,manytheoreticalmodelsof pricingignoretheinstitutionalstructureofthedistributionchannelthatleadstotem- porary,promotionalpricecuts,therebyignoringakeysourceofpricechangesfacing consumers.InChapter9,AndersonandFoxofferabroadoverviewofthemanage- rialandinstitutionaltradepromotionpracticesofmanufacturersandretailers.They alsosurveythelargeliteratureonpricing,illustratingthegapsinthetheoryandthe opportunitiesforfutureresearch.Thediscussiontiestogetherthekeyfactorsdriving promotions, including the vertical channel itself, price discrimination, vertical and horizontalcompetitioninthechannel,andconsumer’sabilitytostockpilegoods. Marketingconsiderationshavebecomevitalinmanyanalysesofpublicpolicyis- sues.Forexample,therearedebatesaboutvariouspublicpolicyinitiativestopromote theconsumptionofhealthierfoods.Onepossibilityendorsedbymanypublicpolicy makers is to provideinformationon the nutritionalcontent, especiallyof processed andfastfoods.Anothermethodadvocatedbysomeistoimpose“vice”taxesonfood productswhicharedeemedundesirable.InChapter10,NevoandGriffithpointout that the evaluation of these policies involve demand modeling and consideration of theresponseoffirmstothesepolicies.Nutritionpolicyisonlyoneexampleofpol- icy evaluation where marketing considerations are important. Analysis of mergers isnowbasedonmodelsofdemandfordifferentiatedproductspioneeredinboththe economicsandmarketingliteratures.Manyotherpublicpolicyquestionshingeonthe promotion,sales,pricing,andadvertisingdecisionsoffirmsand,therefore,providea strongmotivationforcontinuedprogressinresearchattheintersectionofeconomics andmarketing. Jean-PierreDubé SigmundE.EdelstoneProfessorofMarketing UniversityofChicagoBoothSchoolofBusinessandN.B.E.R. Chicago,IL,UnitedStates Preface xix PeterE.Rossi AndersonSchoolofManagement UniversityofCalifornia,LosAngeles LosAngeles,CA,UnitedStates
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