Essays In Consumer Choice Dynamics And Their Implications On The Design Of Firm Strategies

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Doctor of Philosophy (PhD)
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Applied Microeconomics
Empirical Industrial Organization
Quantitative Marketing
Advertising and Promotion Management
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Li, Minshen

This dissertation is composed of two essays, each covering an important topic related to consumer choice dynamics and their implications on the design of firm strategies: (1) consumer learning and their implications on the use and design of introductory coupons that apply to the first-time purchases of a new product to enhance its profits; (2) distinguishing between different sources of consumer choice dynamics in a non-tiered loyalty program and its implications on the design of a more profitable program. In Chapter 1, I propose that in the retailing business, when consumer behavior exhibits individually heterogeneous choice dynamics, coupons are a useful tool to implement intertemporal price discrimination and targeted pricing. I document a one-time own-product passive learning process in consumers' purchasing behavior in the Boston Greek Yogurt market, where four new products entered the market in the Summer of 2012. Using a sample of 428 consumers who purchased at least one Greek Yogurt product during 2012 and 2013, I develop and estimate a structural model of consumer demand for Greek Yogurt products that captures three primary features that are specific to consumers' purchasing behavior in this market: (1) a one-time own-product passive learning process, (2) the purchase of varieties, and (3) the purchase of quantities. By estimating the model, I quantify the individual heterogeneity in (1) the price sensitivity, (2) the demand changes driven by consumer learning, and (3) the timeline of learning about different products. The documented learning process and the individual heterogeneity in the above dimensions in this multi-new-product marketing environment motivate (1) the use of a one-time coupon that is applicable for the first-time purchase of a new product to enhance its profits by leveraging the learning-driven changes in consumer demand, (2) the use of a coupon expiration date to filter out any "late", unprofitable coupon redemption, and (3) coupon customization to target different consumer with different designs. Using the estimated model, I compute the optimal coupon design for Chobani Flip to maximize its Net Present Value (NPV, the discounted profits summed over an infinite horizon since the product enters the market). The results show that the optimal targeted one-time expirable coupons can enhance the product's NPV by 55%. The NPV gain comes from three sources: (1) approximately 1/2 of this NPV gain comes from using the coupons to generate the intertemporal price discrimination that leverages the learning process; (2) approximately 1/3 of this NPV gain comes from targeted pricing that is achieved through coupon customization; and (3) the remaining 1/6 of this NPV gain comes from adding the targeted expiration dates to the coupons for filtering out any "late'', unprofitable coupon redemption. In Chapter 2, I distinguish between two different types of incentives that motivate consumers to spend more actively with a credit card in a non-tiered credit card loyalty program. By separately measuring them, I explore how to leverage the two types of incentives to re-design the current program to enhance the profit for the credit card company. I propose a framework that defines and incorporates two mechanisms through which a non-tiered loyalty program incentivizes cardholders to increase their credit card spending: (1) an economic mechanism, where forward-looking consumers with rational expectation are motivated by the option value of earning vouchers that derives from their potential redemption of vouchers in the future; and (2) a psychological mechanism, where consumers pursue the extrinsic reward thresholds established by the program as goals and are motivated by the satisfaction upon goal achievement, regardless of their actual voucher redemption behavior. Using a sample of 621 consumers between 2010 and 2012, with real-time records on their (1) credit card transactions, (2) activity of earning loyalty points, (3) activity of earning vouchers, and (4) activity of voucher redemption, I develop and estimate a structural model of consumer decisions on credit card spending and voucher redemption that is based on the above framework. Using the estimated model and through counterfactual experiments, I find that (1) the rewards generated by the current loyalty program, while resulting in a minimal price discount (up to 1%), effectively increase the sample population's credit card spending by 6%; and (2) approximately 89% of this increase is driven by the psychological mechanism. Given the relatively effective psychological mechanism and the relatively ineffective economic mechanism, I show through another set of counterfactual experiments that (1) increasing the points issuance ratios (points issued per dollar spent), a policy change that leverages both the economic and psychological mechanisms, will result in a profit increase for the credit card company but a welfare decrease for cardholders; (2) increasing the voucher face value, a policy change that only leverages the economic mechanism, will result in a profit decrease for the credit card company but a welfare increase for cardholders; and (3) to achieve a win-win outcome where profits and consumer welfare would both increase, it is necessary to increase both the points issuance ratios and the voucher face value.

Aviv Nevo
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