Shaping Consumer Expectations through Integrated Marketing

In my dissertation, I study the managerial implications when firms can use different strategies to influence consumers’ learning process. For example, in the first chapter, I focus on consumers’ learning about product fit, which is relevant to the frequently discussed phenomenon of showrooming. Showrooming is the phenomenon where consumers visit a brick-and-mortar (B&M) store to examine the products but then buy online to obtain lower prices. Though it is usually considered a major threat to the B&M retailers, the popular arguments ignore the strategic role of the manufacturer in the distribution channel. After all, the manufacturer’s need for retail informational services has always been one of the essential reasons for retailers to exist and is a means for retailers to achieve profitability. This chapter analytically shows that when the manufacturer’s decisions are considered (i.e., when the manufacturer-retailer contract is endogenous), consumers’ ability to engage in showrooming may lead to increased, rather than decreased, profitability for B&M retailer(s). Thus, retail efforts to restrict showrooming behavior may be misguided. This result holds even if the manufacturer is restricted to wholesale-only contracts and is not allowed to price discriminate between channels. In the second chapter, I focus on consumers’ learning about product quality. It is common for consumers to rely on opinion leaders, who presumably have a higher expertise in the product category, to form beliefs about the product quality. At the same time, the evaluations and product adoptions of opinion leaders are influenced both by the product quality and by their idiosyncratic preferences (fit). When opinion leaders do not provide a very detailed review, their followers need to form expectations of how much the opinion leader’s recommendation is driven by product quality and how much it is driven by an idiosyncratic fit of the product to the opinion leader. This chapter considers how the firm should adjust its optimal choice of the product variety in the presence of word of mouth, given that the opinion leader is likely to have more expertise and therefore, be better able to choose the version of the product that fits her best. It shows that while the opinion leader’s presence may be a force toward either an increased or decreased number of variants, generally speaking, the distortion is upward if it is more difficult to satisfy the opinion leaders, which could be either due to the higher importance of fit or due to their higher standards. I further show that the firm’s knowledge of the true quality may increase the distortion of the number of product variants it offers even when the equilibrium number of variants is pooling across the product qualities. The third chapter of my dissertation looks into the effect of scalping on consumers’ expected market structure and in turn the firms profit. Scalpers purchase the products with limited supply for reselling them later at inflated prices. Though firms often impose restrictions on scalping, we rarely observe actions that completely eliminate scalpers. This chapter explains why and how an intermediate level of restrictions on scalping can be optimal for the firm purely from the perspective of the firm’s profitability. I consider a firm with limited capacity. Consumers decide between purchasing the product before resolving the uncertainty, and waiting at the risk of the price increasing and the product selling out. I find that the firm’s profitability can indeed be maximized at an intermediate level of scalping. This result is an outcome of two opposing effects of scalping. On the one hand, the scalpers’ higher flexibility in setting the price decreases consumers’ expected payoff of waiting, making them more eager to pay a high price right away. On the other hand, the competition between the scalpers and the firm can decrease the firm’s equilibrium price. This result provides an explanation for the firms’ seemingly contradictory practices: they do impose some but not complete restrictions on scalping.