The following is a list of current working papers.
Searching for Rewards
(with T. Tony Ke and Xu Zhu), under review at Management Science
Loyalty programs are pervasive across numerous markets, offering members rewards based on their past purchases for future benefits. This study explores the dynamics of loyalty programs within a repeated ordered search framework, where consumers sequentially search for the optimal product across multiple firms over two periods. Our findings reveal that firms strategically use price discounts and rewards to influence consumer behaviors. Price discounts discourage further search in the current shopping period, while rewards encourage consumer loyalty by inducing prominence in subsequent visits. As search costs increase, firms tend to offer lower price discounts but higher rewards. This strategy increases industry profit but reduces consumer surplus. Compared with its absence, loyalty programs decrease both industry profit and consumer welfare, leading to a lose-lose outcome. Moreover, we demonstrate that when the market is heterogeneous, high-type firms, with larger networks, offer lower rewards but achieve higher second-period prices and greater consumer loyalty, contrasting with low-type firms that compensate with higher rewards for their smaller networks. This study offers new insights into the strategic use of loyalty programs and their impact on market competition. More…
Targeted Advertising as an Implicit Recommendation and Personal Data Opt-out
(with Z. Eddie Ning and Jungju Yu), under minor revision at Marketing Science
Advances in data collection and algorithms help advertisers to better target individual consumers by predicting each consumer’s preferences. We first show that when consumers have uncertainties about their preferences, an ad targeted to a consumer carries an implicit message: the algorithm predicts that the product fits her preferences. This implicit recommendation influences the consumer’s purchase decision but also introduces misaligned incentives. As the accuracy improves, consumer inference from targeted ads becomes stronger, but so does the advertiser’s incentive to exploit this recommendation effect to affect the consumer’s decision. Under exogenous price, when individual-level prediction becomes more accurate, the advertiser adopts a less targeted advertising strategy due to its enhanced incentive to exploit a stronger recommendation effect. Even under perfect accuracy, consumers still receive ads for “bad products” and make incorrect purchase decisions. Despite these negative consequences, the consumer surplus can remain positive because the firm can better identify consumers with a good fit for the product. In contrast, under endogenous price, a better prediction allows the advertiser to raise its price instead of exploiting its recommendation effect. Thus, it leads to more targeted advertising and decreasing consumer welfare, which may incentivize consumers to opt-out of data collection. More…
Demand Externalities from Co-Location
(with B. Sen, K. Sudhir and N. Yang), revise and resubmit for 2nd round review at QME
We illustrate an approach to measure demand externalities from co-location by estimating household-level changes in grocery spending at a supermarket among households that also buy gas at a co-located gas station, relative to those who do not. Controlling for observable and unobserved selection in the use of the gas stations, we find significant demand externalities; on average a household that buys gas has a 7.7% to 9.3% increase in spending on groceries. Accounting for differences in gross margins, the profit from the grocery spillovers is 130% to 150% the profit from gasoline sales. The spillovers are moderated by store loyalty, with the gas station serving to cement the loyalty of store-loyal households. The grocery spillover effects are significant for traditional grocery products, but 23% larger for convenience stores. Thus co-location of a new category impacts both inter-format competitions with respect to convenience stores (selling the new category) and intra-format competition with respect to other supermarkets (selling the existing categories). More…