- Substantive: Market Research, Digital Marketing, Social Media, Emerging Markets
- Methodology: Field Experiments, Applied Game Theory, Structural Modeling
Demand estimation is important for new product strategies, but is challenging in the absence of actual sales data. We develop a theory-based, cost-effective method to estimate the demand for new products using choice experiments. Our premise is that there exists a structural relationship between manifested demand and the probability of consumer choice being realized. We illustrate the mechanism using a theory model, in which consumers learn their product valuation through costly effort and their effort incentive depends on the realization probability. The theory predicts that as the realization probability increases, the demand curve gets steeper.
We run a large-scale choice experiment on a mobile game platform, where we randomize the price and realization probability of a new product. For a consumer that faces price p and realization probability r, if she indicates that she is willing to purchase the product, we will run a lottery and there is probability r that she will get the product and pay p. Otherwise, she cannot get the product and will not be charged. We find reduced-form support of our theoretical hypothesis, and the underlying mechanism is also supported as the measures of consumers' effort increase with the realization probability. We then estimate a structural model of consumer choice using data from the subsample of smaller realization probabilities, leaving the 1-probability group as the holdout sample. The structural estimates allow us to infer the actual demand with high accuracy.
- “Cooperative Search Advertising," Xinyu Cao and Tony Ke. Marketing Science, revise & resubmit
Channel coordination in search advertising is an important but complicated managerial decision for both manufacturers and retailers. A manufacturer can sponsor retailers to advertise its products while at the same time compete with them in position auctions. We model a manufacturer and its retailers' cooperation and intra-brand competition in search advertising, incorporating inter-brand competition with other advertisers as well. We consider a simple coordination mechanism where a manufacturer shares a fixed percentage of a retailer's advertising cost. Our model prescribes the optimal cooperative advertising strategies from the manufacturer's perspective. We find that it may not be optimal for a manufacturer to cooperate with all of its retailers, even when they are ex ante the same. This reflects the manufacturer's tradeoff between larger demand and higher bidding cost caused by more intensified competition. With two asymmetric retailers, the manufacturer should support the retailer with the higher channel profit per click to get a higher position than the other retailer. The manufacturer should take a higher position than a retailer when its profit per click via direct sales exceeds the channel profit per click of the retailer. We also investigate how a manufacturer uses both wholesaling and advertising contracts to coordinate channels with endogenous retail prices.
- “Rational Spamming," Xinyu Cao, John Hauser, Tony Ke, and Juanjuan Zhang. To be submitted to Marketing Science
Advertising on social media faces a new challenge as consumers can actively choose which advertisers to follow. A Bayesian learning model suggests that consumers with limited attention may rationally choose to unfollow a firm. This happens if consumers already know enough about the firm's value and if the firm advertises too intensely. However, firms might still find intensive advertising to be the optimal strategy. If a firm is perceived as having a lower match value, it wants to advertise aggressively to change consumers' beliefs about its value; if a firm is perceived as having a higher match value, it also wants to advertise intensively, but in an effort to crowd-out advertising messages from its competitors. Tracking company accounts of 49 TV shows on the most popular tweeting website in China provides empirical evidence that both popular and non-popular firms advertise intensively, although the number of followers goes down when a firm advertises too intensively.
Work in Progress
- "The Sound of Music" with Teck Ho, Saiquan Hu, and Juanjuan Zhang
- "Referral Programs: What Works Best and Why" with Xiaojing Dong and Liwen Hou