Tony Ke, Lin Song
Many products are correlated because they share some similar or common attributes. We show that when these attributes are uncertain to consumers, a complementarity effect can arise among competing products, in the sense that a lower price of one product may increase the demands of others. The effect occurs when consumers optimally search for information about both common and idiosyncratic product attributes prior to purchase. We characterize the optimal search strategy for the correlated search problem and provide the conditions for the existence of the complementarity effect. We further explore the implications of the effect for firm pricing. When firms compete in price, although product correlation may weaken differentiation between the firms, the complementarity effect due to correlated search may raise equilibrium price and profit.
Most products comprise both digital and inspection attributes. For example, while the style of apparel and shoes can be conveyed online, assessing fit still requires personal inspection. In a discrete model of match, we examine the effects of webrooming in a duopoly. When the match probability of the digital attribute is sufficiently low, a counter-intuitive result is that webrooming increases both firms’ profits. Here the reason is that webrooming induces greater participation. This finding is thus opposite to the general impression from the popular press that webrooming intensifies competition by releasing more information. We then generalize this analysis to a model of continuous match values. Here, webrooming still increases both firms’ profits under broad conditions. The reason is that webrooming informs each consumer about her relative preference over the two firms’ digital attributes and, consequently, her optimal search sequence.
CHEN Yubo is Associate Dean, Professor, and Director of Center for Internet Development and Governance at School of Economics and Management, Tsinghua University. He received his Ph.D. in Marketing from the University of Florida, M.Eng. in Systems Engineering and B.Eng. in Industrial Management Engineering from Southeast University. Before joining Tsinghua SEM., he was a tenured professor at Eller College of Management, University of Arizona, USA. He is a recipient of the National Science Fund for Distinguished Young Scholars from the National Natural Science Foundation of China, and selected for the Top-Notch Young Professionals Program of China. Prof. Chen’s main research areas include 1) big data and business innovation in the networked world; 2) market transformation and business analytics in the mobile internet era; 3) digital transformation of Chinese economy, and 4) climate change and sustainability strategy. Prof. Chen has published many articles in top marketing and business journals such as the Journal of Marketing, the Journal of Marketing Research, Marketing Science, and Management Science, including one article been listed as “Most Cited Papers” at Management Science in the last ten years by ISI. His research has won many international awards and recognitions, including INFORMS Frank M. Bass Best Paper Finalist Award, Journal of Marketing MSI/Paul H. Root Award Finalist, Journal of Marketing Research William F. O’Dell Long-term Impact Award Finalist, Journal of Interactive Marketing Best Paper Award and Emerald Citations of Excellence.
The imbalanced development of logistics and payment makes it difficult for an online retailer to reduce the uncertainty of online shopping in emerging markets. In response, some online retailers establish a hybrid e-commerce platform in the hope to reduce online shopping uncertainty, and thus to establish customers’ trust in the platform and increase their purchases. Based on two natural experiments arising from JD.com’s initiative of establishing its own delivery service, we examine how the setup of a hybrid e-commerce platform influenced customers’ shopping behaviors between 2009 and 2013. We find that the founding of a hybrid e-commerce platform led customers to increase purchases by 7 to 10 percent at city level. In addition, we find that the sales boosting effect is greater for (1) cities with less mature shipping service, (2) light-buyers, (3) categories with higher uncertainty, and (4) products with fewer discounts. The results are consistent with the interpretation that the establishment of a hybrid e-commerce platform improves shoppers’ trust in the online retailer. Thus, a hybrid platform does more than to speed up the delivery, but more importantly, it helps to build customer trust in the business.