A. Yeşim Orhun
A. Yeşim Orhun
How Price Dispersion Changes when Upgrades are Introduced: Theory and Empirical Evidence from Airline Industry
forthcoming at Management Science
Abstract. In recent years, major U.S. airlines introduced the option to upgrade to premium economy seating which provides comfort-enhancing features compared to regular economy seating. This paper examines the effect of the introduction of this upgrade option on the airline’s price dispersion in the main cabin. We first provide a theoretical analysis of the airline’s optimal pricing policy when customers exhibit multi-dimensional heterogeneity, and the airline price-discriminates intertemporally for its regular economy seating and can offer an upgrade option to premium economy seating. Our analysis highlights two competing pressures on main cabin prices. On the one hand, the airline benefits from lowering its prices because by allowing more customers to purchase in the first place, it increases the probability of selling upgrades (admission effect). On the other hand, for some customers, the value of flying with the airline increases due to the upgrade availability, therefore the airline may find it optimal to increase its prices (valuation effect). In the second part of the paper, we conduct an empirical investigation of the impact of the introduction of the upgrade option on main cabin prices based on a proprietary transaction-level dataset from a major U.S. airline company. The empirical analysis tests the main predictions of our theoretical model and provides further insights. The results show that the introduction of the premium seating upgrade is associated with an increase in the price dispersion in the main cabin, the admission effect is stronger than the valuation effect on the low-end of the price distribution, and the opposite is true on the high-end of the price distribution.
Perceived Motives and Reciprocity
forthcoming, Games and Economic Behavior (working paper version)
Abstract. In reciprocal interactions, both genuine kindness and self-interested material gain may motivate socially beneficial actions. The paper presents results from two experiments that distinguish the role of perceived motives in reciprocal decision making from the role of outcomes or perceived intentions. The results indicate that positive reciprocity triggered by the same beneficial action is lower when the first-mover is more likely to be motivated by strategic incentives. Therefore, stronger incentives for beneficial behavior may not increase total welfare.
Impact of Competition on Product Decisions: Movie Choices of Exhibitors
with Sriram Venkataraman and Pradeep Chintagunta, Marketing Science, 35 (1), 2015.
Abstract: We empirically study the impact of entry of a new theater on two important product decisions that incumbents in the movie exhibition industry face: 1) whether to invest in screening movies that are expected to be popular and 2) when to adopt new releases. For theaters, both of these decisions feature a cost-demand tradeoff inherent in quality decisions; while screening popular and recent movies brings more patrons to the theater, distributors take a higher share of the revenue for such movies. The impact of competitive entry on the incumbent’s quality decisions is ambiguous, as it may simultaneously increase the competitive pressure to invest more in these dimensions of quality and also change the demand conditions that incumbents face. We find that incumbent theaters do not increase the provision of popular and recent movies in response to rival entry. To identify the role of competitive incentives, we study the differential impact of entry based on whether or not the entrant belongs to the same parent firm as the incumbent theaters. This comparison reveals that competitive incentives do lead to incumbents screening movies with high expected success more frequently and adopting movies sooner. The product responses we document have important implications for the revenue impact of entry and the conclusions that researchers can draw from this impact. Ignoring the provision of these quality dimensions suggests cannibalization to exceed business stealing, a conclusion that is reversed when we account for endogenous product responses. We also show that our findings on popularity and recency cannot be explained by concomitant changes in theaters’ other product decisions, such as the variety of movies screened.
Spatial Differentiation in the Supermarket Industry: The Role of Common Information
Quantitative Marketing and Economics, Vol. 11, p. 3-37, 2013.
Abstract: I investigate the geographic location decisions of supermarkets to infer their tradeoffs between locating close to favorable demand conditions and differentiating themselves geographically from rivals. The model is based on a discrete-choice game between two types of supermarkets, and incorporates firm uncertainty arising from firm- and location-level private information as well as researcher uncertainty arising from location-level common information. Thus the model addresses the concern that firms’ actions may be based on factors that are unobservable to the researcher, thus correlated conditional on observables.The estimates reflect a significant level of common information. Importantly, I find that ignoring unobserved location heterogeneity results in biased estimates of both the competitive effects and the effects of location-specific observables on profits. Counterfactual predictions are therefore misleading if unobserved location heterogeneity is unaccounted for.
Conditional Projection: How Own Evaluations Impact Beliefs about Others Whose Choices Are Known
with Oleg Urminsky, Journal of Marketing Research, Vol 50, Issue 1, p.111-124, 2013.
Abstract: We study how a person’s evaluation of choice options influences her estimates of other people’s evaluations when their choices are known. People rely on the relation between their own evaluations and their final decision to make sense of others, projecting their evaluations of the corresponding options. A person’s liking of the option she chose between two alternatives influences her estimates of others’ liking of the option they chose, regardless of whether it matches her own choice. Likewise, her evaluation of the option she rejected affects her estimate of others’ evaluations of the option they rejected. Across four studies, we provide evidence of conditional projection in political and consumer decisions, using across-people differences in ratings of choice options, within-person changes in ratings, as well as manipulated differences in participants’ ratings. We demonstrate that existing accounts of projection would not directly predict our findings, and rule out other alternative explanations.
A Reflection on Analytical Work in Marketing: Three Points of Consensus
with Raphael Thomadsen, Robert Zeithammer, Dina Mayzlin , Amit Pazgal , Debu Purohit, Ram C. Rao, Michael Riordan, Jiwoong Shin, Monic Sun, J. Miguel Villas-Boas, Marketing Letters, Vol 23 (2), 2012.
Optimal Product Line Design When Consumers Exhibit Choice-Set Dependent Preferences
Marketing Science, Vol. 28, Issue 5, 2009.
Abstract: In a market of consumers with varying willingness to pay, using product line as a discrimination tool may extract higher profits than serving all consumers with a single product. Local context effects, however, point to yet another consideration in designing product lines: how the appeal of a product changes with the context provided by other products in the choice set. I present a model of product line design that incorporates both discrimination and context management goals and offers recommendations for the variety and positioning of products. To this end, the model makes use of a framework that allows preferences to be choice set dependent. Given this framework, I study how the firm manages externalities between products created by such dependencies. The firm creates distortions above and beyond those resulting from discrimination motives alone. For example, in a vertically differentiated market for quality, quality distortions exist even for the consumers with the highest valuations. The range of quality provisions, given the number of products, is compressed as the relative importance of unfavorable comparisons among products increases. Surprisingly, this compression may even lead the firm to forego discrimination among consumers regardless of the cost of offering distinct products.
Interrelated Discrete Choice Models of Firms Strategic Decisions
with Michaela Draganska, Sanjog Misra, Victor Aguirregabiria, Pat Bajari, Liran Einav, Paul Ellickson, Dan Horsky, Sridhar Narayanan, Peter Reiss, Katja Seim, Vishal Singh, Raphael Thomadsen and Ting Zhu, Marketing Letters, Vol. 19, 3/4, 2008.
Auction Fever: The Effect of Opponents and Quasi-Endowment on Product Valuations
with James Heyman and Dan Ariely, Journal of Interactive Marketing, Vol. 18, Number 4, Autumn 2004.
Abstract: The wide adoption of dynamic second-price auctions as the format of choice for Internet-based (online) transactions has created an interest in understanding how individuals behave in such environments. The current work concentrates on two dynamic effects, which we call quasi-endowment and opponent effect, and finds that these effects may result in over-bidding. The results of two experimental auctions—one involving hypothetical bids and the other real-money bids—demonstrate that bids reflect valuations that include the nonnormative influences of the two factors. Quasi-endowment and opponent effects could lead to the behaviors of repeated bidding and sniping commonly observed in second-price online auctions such as eBay.
Frugality is Hard to Afford, with Mike Palazzolo
Abstract: Households commonly utilize strategies that provide long-term savings on everyday purchases in exchange for an increase in their short-term expenditures. For example, they buy larger packages of non-perishable goods to take advantage of bulk discounts, and accelerate their purchases to take advantage of temporary discounts. However, use of such strategies requires that households have the liquidity necessary to increase their short-term spending. Using the Nielsen consumer panel dataset, this paper provides causal evidence that liquidity constraints inhibit low-income households’ ability to use such strategies, above and beyond the impact of other constraints, revealing a previously undocumented dimension of the poverty penalty. Our finding suggests that low-income households will be less responsive to promotions that require intertemporal substitution than their higher-income counterparts, and that they will be more responsive during times of higher liquidity (e.g., shortly after receiving paychecks) than during times of lower liquidity. We discuss marketing and policy implications of this result.
Intrinsic Information Preferences and Skewness (with Collin Raymond and Yusufcan Masatlioglu)
Abstract: We present experimental results from a broad investigation of intrinsic preferences for information. We examine whether people prefer negatively skewed or positively skewed information structures when they are equally informative, whether people prefer Blackwell more informative information structures, and how individual preferences over the skewness and the degree of information relate to one another. The wide scope of our investigation not only reveals new insights regarding intrinsic preferences for information, but as we show, also allows for testing of existing models in this domain. We find that models based on the framework of Kreps and Porteus (1978) and Caplin and Leahy (2001), are the most consistent with the data we observe.
Impact of Status Incentives: The Case of the Airline Industry
We are revising the paper, please email me for the latest version.
Abstract. This paper explores the impact of status incentives provided by a major U.S. airline on the purchasing behavior of its frequent flier program members. We leverage a database of complete transaction histories of more than six million members to study within-person changes in purchases as members progress towards a status goal. We show that within-person changes in the distribution of price and route characteristics of tickets purchased from the airline reflect consumer substitution behavior from competing alternatives. We present three empirical manifestations of increased customer loyalty on market outcomes. When members are close to achieving their status goal compared to when they are starting to accumulate points, they 1) book with the airline even at higher prices than usual, increasing the price they pay compared to other passengers by about 8% on average, 2) become more likely to choose the airline over the competition on routes where the airline is generally less attractive and more expensive compared to its competitors, and 3) substitute from driving or taking other forms of transportation on shorter trips to flying with the airline.
Systematic Differences in Beliefs About Others in Strategic Interactions
Please click here for the paper
Abstract: Individuals’ preferences for outcomes and their expectations about other players’ choices that influence the outcome govern strategic interactions. The common assumption that expectations about others are mutually consistent across players allows researchers to infer preferences from observed strategic decisions. In this paper, I show how players beliefs about other players choices systematically depart from this assumption and explain the consequences for the inference of preferences based on strategic choices. In the context of altruistic preferences, I document a relationship between an individual’s preferences and his (implicit or explicit) expectations of others’ actions in modified dictator games. This relationship is beyond what false consensus or a simple correlation between beliefs and preferences can account for and is consistent with a more fundamental account of projection of preferences. I study the impact of systematic belief differences on players strategic actions in a trust-dictator game. I show that preference incongruencies across different roles in a trust-dictator game are in line with preference projection. Finally, I demonstrate biases in the estimation of preferences from decisions in this strategic game under the assumption of mutually consistent beliefs.
Guilt Aversion Revisited: Not All Expectations are Alike
Threat of Entry: Airlines’ Product Responses, with Ying Fan
Positive Reciprocity Puzzle: Fitting the Pieces Together
Social Pricing in Sharing Economy: Evidence from Airbnb, with Yao Cui and Ming Hu