nep-mkt New Economics Papers
on Marketing
Issue of 2007‒11‒10
seven papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Search Engine Advertising: Pricing Ads to Context By Avi Goldfarb; Catherine Tucker;
  2. "An Individual Level RF Analysis based on Consumer Behavior Theory: A Hierarchical Bayes Framework on the Pareto/NBD Model"(in Japanese) By Makoto Abe
  3. Advertising and production of a seasonal good for a heterogeneous market: from total segment separability to real media By Daniela Favaretto; Bruno Viscolani
  4. The Control of Porting in Two-Sided Markets By Pollock, R.
  6. Dynamic Advertising with Spillovers: Cartel vs Competitive Fringe By Luca Lambertini; Arsen Palestini
  7. Have we been Mugged? Market Power in the World Coffee Industry By Christopher L. Gilbert

  1. By: Avi Goldfarb (Rotman School of Management, University of Toronto); Catherine Tucker (Sloan School of Management, MIT);
    Abstract: Each search term put into a search engine produces a separate set of results. Correspondingly, each of the sets of ads displayed alongside these results is priced using a separate auction. Search engine advertising prices therefore reflect willingness to pay for context, unlike traditional ad prices that reflect willingness to pay for audience demographics. A growing policy debate asks if this marketing strategy merely makes advertising more informative, or whether it also effectively extracts rent from advertisers. To inform this debate and to better understand search engine advertising more generally, we examine advertising prices paid by lawyers for 174 Google search terms in 195 locations and exploit a natural experiment in “ambulance-chaser” regulations across states. Where contingency fee limits exist, the relative price of advertising is $2.27 lower. This suggests that context-based pricing allows prices to reflect heterogeneity in the profitability of customer leads. When lawyers cannot contact a client in writing, the relative price per ad click is $0.93 higher. This suggests that context-based pricing allows prices to reflect heterogeneity in advertisers’ other advertising options, even within a given local market. Thus, our results suggest that search engine advertising does give market power to the media platform; however, this market power is mitigated by substantial competition from offline marketing communications channels.
    Keywords: search engines, advertising, market power, advertising prices
    JEL: L86 M37
    Date: 2007–09
  2. By: Makoto Abe (Faculty of Economics, University of Tokyo)
    Abstract: This research extends a Pareto/NBD model of customer-base analysis using a hierarchical Bayesian (HB) framework to suit today's customized marketing. The proposed HB model presumes three tried and tested assumptions of Pareto/NBD models: (1) a Poisson purchase process, (2) a memoryless dropout process (i.e., constant hazard rate), and (3) heterogeneity across customers, while relaxing the independence assumption of the purchase and dropout rates and incorporating customer characteristics as covariates. The model also provides useful output for CRM, such as a customer-specific lifetime and survival rate, as by-products of the MCMC estimation. Using two different types of databases --- music CD for e-commerce and FSP data for a department store, the HB model is compared against the benchmark Pareto/NBD model. The study demonstrates that recency-frequency data, in conjunction with customer behavior and characteristics, can provide important insights into direct marketing issues, such as the demographic profile of best customers and whether long-life customers spend more.
    Date: 2007–11
  3. By: Daniela Favaretto (Department of Applied Mathematics, University of Venice); Bruno Viscolani (Dept. of Pure and Applied Mathematics, University of Padua)
    Abstract: Market segmentation is a fundamental topic of marketing theory and practice. We bring some market segmentation concepts into the statement of an advertising and production problem for a seasonal product with Nerlove-Arrow's linear goodwill dynamics, along the lines of some analyses concerning the introduction of a new product. We consider two kinds of situations. In the first one, we assume that the advertising process can reach selectively each segment. In the second one, we assume that one advertising medium is available and that it has a known effectiveness segment-spectrum for a non-trivial set of segments. In both cases we study the optimal control problems in which goodwill productivity of advertising is either linear or concave, and good production costs are (convex and) quadratic. We obtain the explicit optimal solutions using the Pontryagin's Maximum Principle conditions.
    JEL: M37 M31 C61
    Date: 2007–10
  4. By: Pollock, R.
    Abstract: A sizable literature has grown up in recent years focusing on two-sided markets in which economies of scale combined with complementarities between a platform and its associated ‘software’ or ‘services’ can generate indirect network effects (that is positive feedback between the number of consumers using that platform and the utility of an individual consumer). In this paper we introduce a model of ‘porting’ in such markets where porting denotes the conversion of ‘software’ or ‘services’ developed for one platform to run on another. Focusing on the case where a dominant platform exists we investigate the impact on equilibrium and the consequences for welfare of the ability to control porting. Specifically, we show that the welfare costs associated with the ‘control of porting’ may be more significant than those arising from pricing alone. This model and its associated results are of particular relevance because of the light they shed on debates about the motivations and effects of actions by a dominant platform owner. Recent examples of such debates include those about Microsoft’s behaviour both in relation to its operating system and its media player, Apple’s behaviour in relation to its DRM and iTunes platform, and Ebay’s use of the cyber-trespass doctrine to prevent access to its site. Key words: Network Effects, Two-Sided Markets, Porting, Antitrust, Competition.
    JEL: L15 L12 L13
    Date: 2007–11
  5. By: Andres Kuusik
    Abstract: The current paper studies the influence of various factors on customer loyalty. The main hypothesis of the study insists that the list of most important factors affecting loyalty is dependant on the level of loyalty of costumers. LOGIT method was used for testing the hypotheses on the sample of survey data about 1000 private customers of the biggest telecommunication company in Estonia. The results reveal that four analysed factors affecting customer loyalty (satisfaction, trustworthiness, image and importance of relationship) are playing different role on the different levels of customer loyalty.
    Date: 2007
  6. By: Luca Lambertini (University of Bologna and The Rimini Centre for Economics Analysis, Italy.); Arsen Palestini (University of Bologna, Italy)
    Abstract: A differential oligopoly game with advertising is investigated, where different dynamics occur between two groups of agents, the former playing a competitive Nash game and the latter cooperating as a cartel. Sufficient conditions for stability and a qualitative analysis of the profit ratio and social welfare at equilibrium are provided. A threshold value for the size of the competitive fringe is pointed out by a suitable numerical simulation.
    Keywords: Advertising, Differential games, Oligopoly, Collusion
    JEL: C73 D43 D92 L13 M37
    Date: 2007–07
  7. By: Christopher L. Gilbert
    Abstract: The coffee industry is highly concentrated both at the retail and export stages. A number of recent commentaries have suggested that this concentration translates into monopolistic and monopsonistic pricing to the detriment of both consumers and farmers. Using time series data for eight major coffee-consuming countries and nine coffee exporters, we find that both retail and export markets have increased in competitiveness over recent decades. Retail markets in traditional coffee-consuming countries are close to being fully competitive but there is evidence of exercise of monopoly power in the non-traditional Japan and UK markets. On the export side, market liberalization has reduced the exercise of monopsony power in most, but not all, exporting countries.
    Date: 2007

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