What the Past Tells about the Future: Historical Price in the Durable Good Market, with Zheng Gong and Yuxin Chen [PDF (2022)]

Management Science, 2022

Abstract: We investigate how historical price information (e.g., accessed through price trackers) influences consumers' purchase decisions and thus affects a firm's dynamic pricing strategy. We first show that when consumers with heterogeneous tastes are not informed about historical prices, the monopolist charges a high regular price for most of the time and periodically holds low-price sales. Then we consider the case in which a small fraction of consumers (such as price tracker users) become informed of historical prices. At the new equilibrium, the monopolist lowers the regular price and advances sales, implying shorter price cycles, more frequent sales, and a positive spillover effect of price tracker users’ informational advantage on the rest of uninformed consumers. We conclude with a discussion of the impact of price trackers on firms and other relevant managerial implications of the model.

Working Papers

A Model of Two Learning Processes

Revise and resubmit, Marketing Science

Abstract: Many studies have shown that before making a purchase decision, consumers make quality inferences from the purchase decisions of others and also seek information from sources such as third-party product reviews and various forms of word-of-mouth communication (e.g., user reviews). This paper proposes a novel model that integrates two consumer learning processes: observational learning and active learning. Within the standard observational learning framework, this model allows for dynamic choice of information acquisition by each consumer after observing the purchase decisions of predecessors. We consider the case where the information source is exogenous and the case where the information increases with sales, and we find that the long-term market outcomes are immediate herd and complete learning, respectively. These two outcomes represent the two limit cases of a generalized version of the model, where firms can control the information flow directly or indirectly through marketing tools. Among other things, this model predicts that the endogenous increase in quality information (e.g., through word of mouth) does not help the market increase the probability of identifying high-quality products, but helps the market identify and eliminate low-quality products. In addition, we discuss the optimal marketing strategies of low-quality and high-quality products under different information settings.

Limited Time Offer and Consumer Search, with Zheng Gong

Revise and resubmit, Management Science

Abstract: This paper studies a commonly seen but theoretically under-explored sales tactic: limited-time offers. A limited-time offer is any form of discount that a consumer can use on a purchase within a certain period of time. When consumers need time to investigate each product, a firm can endogenously direct the consumer search order by advertising limited-time offers, inducing potential consumers to sample its product early. Whether and how the firm uses limited-time offers depends on the reservation value of its product to the target market. When consumers have only outside options, the firm will use limited-time offers to gain prominence if and only if its reservation value is higher than the outside options. When there are many strategic firms competing for the same target market, the firm with higher reservation value will offer discounts in a shorter time window relative to its competitors, and in equilibrium, it will be sampled earlier by consumers. Contrary to the existing literature, we demonstrate that limited-time offers can increase total welfare through inducing the socially optimal search order.

Should Google Profit like a Taxi Driver? [PDF]

Abstract: In recent years, numerous European countries have taken or have considered taking regulatory actions against Google News with the aim of improving news quality. This paper explains how news aggregators affect newspapers' incentives in quality investment from two novel perspectives: (1) a positive market-expansion effect of news aggregators by eliminating information asymmetry between newspapers and news readers, and (2) a negative business-stealing effect by displaying excerpts of newspaper articles (snippets) on news aggregators' own sites, which are substitutes of original news. The model illustrates both effects and can be used to evaluate taxation policies on snippets. A tax proportional to how much information extracted from the original news, or a click-through subsidy paid by newspapers to aggregators can discourage news aggregators from showing free previews to appropriate traffic. Moreover, I extend the benchmark setting from one single newspaper to multiple newspapers, capturing an additional competition-in-traffic effect among newspapers. Finally, I also show that the model is robust to many other generalizations.

Early Birds and Second Mice in the Stock Market [PDF], with Julio A. Crego

Abstract: This paper studies learning in the stock market. Our contribution is to propose a model to illustrate the endogenous timing decision on trading, taking into account the incentive of learning from others about the fundamental value. The model is similar to Easley and O'Hara (1992), except that we introduce less-informed traders whose private information is inferior to fully-informed traders, but superior to that of random noise traders and a zero-profit market maker. We also allow both types of informed traders to optimize timing of trading. We show that fully-informed traders act as early birds because it is optimal for them to buy or sell at the earliest possible time; meanwhile, less-informed traders could be better off as second mice by delaying transactions to learn from previous trades. The greater information asymmetry between the less-informed traders and the market maker, the larger profits the former could make even though the latter is learning from all trades.