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Following the development of decentralized production technologies, energy communities have become a topic of increased interest. While the potential benefits have been described, we use the framework of cooperative game theory to test the ability of such communities to adequately share the gains. Indeed, despite the potential value created by such coalitions, there is no guarantee that they will be viable: a subset of participants may find it profitable to exit the community and create another one of their own. We take the case of a neighborhood, having access to a limited resource--e.g. a shared roof or piece of land--which they can exploit if they invest in some renewable production capacity. By joining the community, participants also enjoy aggregation gains in the form of reduced network fees. We find conditions depending on the structure of renewable installation costs, on the magnitude of the aggregation effect and coordination costs and, most importantly, on the chosen sharing rule, under which the whole energy community is stable. In particular, we show that standard sharing rules often fail to enable communities to form and we suggest the adoption of slightly more sophisticated rules. Efficiency could require the intervention of a local planner or a change in network tariff structures. Keywords: Energy communities, Cooperative game theory, Decentralized power production, Consumer participation, Micro-grids, 1. INTRODUCTION The notion of energy communities has received increased interest over the past few years, fostered by better information and communication technologies and an increase in environmental awareness. Small [...]

Abstract. We provide a dynamic, game-theoretic model to examine a firm's quality and pricing decisions for its new experience goods. Early consumers do not observe product quality prior to purchase [...]

Abstract. This paper analyzes the energy efficiency (EE) investment decisions of a capital-constrained manufacturer that competes with an alternative supplier for the business of a large industrial buyer. Through a [...]

Abstract. Telecommunications service is an important and growing market, with worldwide revenue exceeding $2.2 trillion in 2016. In the U.S. market, the total number of mobile wireless connections has grown [...]

Abstract. An on-demand service platform connects waiting-time-sensitive customers with independent service providers (agents). This paper examines how two defining features of an on-demand service platform--delay sensitivity and agent independence-impact the [...]

Abstract. Emissions regulation is a policy mechanism intended to address the threat of climate change. However, the stringency of emissions regulation varies across regions, raising concerns over carbon leakage--an outcome [...]

For resource-based economies, regulating exports is crucial. Nevertheless, we observe different countries deploying different export policies. We explain this difference via strategic interactions by giving two competing countries the possibility to design their export markets and select the level of competition they exert. In a first step, we test standard models and find that they fail to explain the multitude of observed behaviors: under the closed loop Nash equilibrium paradigm, the equilibrium is reached when countries completely open their export market. The Stackelberg game on the other hand concentrates the market in a plausible way but is not symmetric since it appoints a leader and follower. In a second step, we let countries choose between being strategic or passive in their interaction and demonstrate that the competitive outcome that we find in the closed loop Nash game rarely occurs. Only this last setup complies with the commonly observed situations. Keywords: Game theory, Cournot models, Open/closed loop models, Stackelberg models, Divisionalization, 1. INTRODUCTION 1.1 Motivation and literature review In a resource-based economy, the regulation of exports is crucial. Most oil-producing countries, like Saudi Arabia, the United Arab Emirates or Russia, export [...]

Evolutionary explanations of anger as a commitment device hinge on two key assumptions. The first is that it is predictable, ex ante, whether someone will get angry when feeling that he or she has been badly treated. The second is that anger is associated with destructive behavior. We test the validity of these two assumptions. We collected photos of responders in an ultimatum game before they were informed about the game that they would be playing, and we filmed responders with webcams during play. We then showed pairs of photos consisting of one responder who rejected and one responder who accepted (a low offer) to an independent group of observers. We find that observers are better than chance at detecting who rejected the low offer; they do 10% better than random guessing would. We also find that anger at receiving a low offer is associated with rejection. History: Accepted by Uri Gneezy, behavioral economics. Funding: Financial support from the Research Priority Area Behavioral Economics of the University of Amsterdam, the Agence Nationale de la Recherche-LabEx Institute for Advanced Study in Toulouse, and the Netherlands Organization for Scientific Research through the Vidi program [Project 452-11-012] is gratefully acknowledged. Supplemental Material: Data and the online appendix are available at https://doi.org/10.1287/mnsc.2017.2727. Keywords: anger * commitment * facial cues * ultimatum game * laboratory experiment, 1. Introduction Anger is costly. Angry people are sometimes willing to pay a price to reduce the payoff of those with whom they are angry. But what benefits does anger [...]

In this paper, we study a conditional upgrade strategy that has recently emerged in the travel industry. After a consumer makes a reservation for a product (e.g., a hotel room), she is asked whether she would like to upgrade her product to a higher-quality (more expensive) one at a discounted price. The upgrade, however, is not fulfilled immediately. The firm fulfills upgrades at check-in if higher-quality products are still available, and the upgrade fee is charged to the consumer if and only if she actually gets upgraded. Consumers decide which product type to book and whether to accept an upgrade offer or not based on the anticipated upgrade probability. We find that conditional upgrades create value by improving demand-supply matching for the firm. The firm can use the conditional upgrade channel to flexibly manage capacity allocations and reoptimize demand segmentation. For a firm that takes product prices as given, offering conditional upgrades is effective in compensating for the firm's lack of ability in setting prices optimally. For a firm that has the ability to optimize product prices, conditional upgrades generate higher revenues than dynamic pricing. History: Accepted by Martin Lariviere, operations management. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2017.2783. Keywords: conditional upgrades * strategic consumers * travel industry * revenue management * Bayesian Nash equilibrium * asymptotic analysis, 1. Introduction Like many other industries, a big challenge faced by the travel industry is the mismatch between demand and supply across different types of products. In the travel industry [...]

Abstract. Many sellers bundle add-ons (e.g., in-flight entertainment, hotel amenities) with core services (e.g., transportation, lodging). One surprising empirical finding is that consumers often believe bundle frames provide greater value [...]

Abstract. The rising obesity epidemic is a worldwide concern for consumers, firms, and policy makers. One reason for the rise in obesity is consumers' over-consumption of vice goods such as [...]

Abstract. Display advertising is a major source of revenue for many online publishers and content providers. Historically, display advertising impressions have been sold through prenegotiated contracts, known as reservation contracts, [...]

We investigate the equilibrium relationship between product quality and word-of-mouth (WOM) communication. Specifically, we ask whether firms should optimally produce 'better' products when consumers are more likely to exchange information. The critical moderating factor in our model is the nature of the communication and what its primary impact is. We first look at WOM that expands awareness of a product. We show that quality may either increase or decrease as WOM expands. The answer depends, in part, on the extent to which the expansion of WOM is one of scale alone or whether it also fundamentally changes the structure of communications. Next, we examine a model in which the primary impact of WOM is to help people to evaluate the utility provided by products with which they are already familiar. Our model suggests that more WOM in this context should always lead to higher-quality products. We demonstrate that the underlying driver of this result is that the elasticity of demand with respect to quality is increasing in the proportion of consumers who are informed about the product's quality. Taken together, the two models therefore suggest that the firm's optimal product-policy response to the growth in social interactions depends on both the content and the structure of the underlying conversations. Finally, we compare both WOM models to analogous models of advertising and demonstrate that the firm's optimal response to a decrease in advertising costs is quite different from that to an increase in WOM. The reason for these differences can be traced back to a fundamental distinction between advertising and WOM: although the former is optimized, the latter is far more random. History: Accepted by J. Miguel Villas-Boas, marketing. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2015.2330. Keywords: marketing * product policy * economics * game theory and bargaining theory * social * word of mouth, I think, on the Internet, word of mouth is more powerful than it has ever been before.... Everybody has an opinion and they share them. So in blogs, on social [...]

The Hospital Readmissions Reduction Program (HRRP), a part of the U.S. Patient Protection and Affordable Care Act, requires the Centers for Medicare and Medicaid Services to penalize hospitals with excess readmissions. We take an economic and operational (patient flow) perspective to analyze the effectiveness of this policy in encouraging hospitals to reduce readmissions. We develop a game-theoretic model that captures the competition among hospitals inherent in HRRP's benchmarking mechanism. We show that this competition can be counterproductive: it increases the number of nonincentivized hospitals, which prefer paying penalties over reducing readmissions in any equilibrium. We calibrate our model with a data set of more than 3,000 hospitals in the United States and show that under the current policy, and for a large set of parameters, 4%-13% of the hospitals remain nonincentivized to reduce readmissions. We also validate our model against the actual performance of hospitals in the three years since the introduction of the policy. We draw several policy recommendations to improve this policy's outcome. For example, localizing the benchmarking process--comparing hospitals against similar peers--improves the performance of the policy. Keywords: healthcare; public policy; game theory; readmissions; Medicare; regulation; incentives History: Received May 31, 2014; accepted May 28, 2015, by Serguei Netessine, operations management. Published online in Articles in Advance February 3, 2016., 1. Introduction According to the Medicare Payment Advisory Commission (MedPAC; Gerhardt et al. 2013), nearly a fifth of Medicare beneficiaries that are discharged from a hospital are readmitted within 30 [...]

Much like in other semiconductor environments, dynamic random access memory (DRAM) manufacturers face significant demand uncertainty before production and capacity decisions can be implemented. This paper investigates the role of market information in DRAM manufacturing and the consequences of allowing information sharing in the industry. An oligopoly model of competition with correlated private information is developed in which firms make decisions about production and capacity. In this setting, firms consider the information their competitors are likely to hold, conditional on their own. We find that both firms and customers benefit when firms share information with their competitors. In particular, sharing information is profitable because market price decreases slowly with overproduction. When combined with the results from the information sharing literature, this paper highlights the need to assess information sharing policies on a case-by-case basis. Keywords: marketing; economics; industrial organization; asymmetric information; information sharing; competitive strategy; game theory; market structure History: Received January 13, 2015; accepted June 23, 2015, by Matthew Shum, marketing. Published online in Articles in Advance February 3, 2016., 1. Introduction Over the last six decades, strategic behavior has remained as one of the centerpieces of economic thought and inquiry. Its prominence is likely to source from its being [...]

In this paper, we study how restricting the availability of patches to legal users impacts the vendor's profits, market share, software maintenance decisions, and welfare outcomes. Prior work on this topic assumes that the hacker's effort is independent of the vendor's decision to release the patch freely or not. Clearly, if the patch is not available to everyone, the hacker finds it easier to exploit the vulnerability in the product and, as a result, is likely to alter his effort. To understand the role of a strategic hacker, we build a game-theoretic model, where the hacker's decision is endogenous. With this model, we find that the hacker's effort may, on the one hand, decrease the utility that the vendor can extract from the consumers but, on the other hand, may help differentiate the legal version of the product from the pirated version. A vendor can strategically exploit the hacker's behavior in its pricing and software maintenance decisions. The endogeneity of the hacker's actions drives several of our findings that have interesting policy implications. For example, the vendor may increase the price and reduce market share to exploit the differentiation. In such a case, there may be more pirates in the restricted-patch case than when the patch is freely available, a result that rims counter to typical arguments provided for restricting patches. Keywords: information security; patch distribution; countervailing incentive; public policy History: Received January 7, 2013; accepted December 21, 2014, by Chris Forman, information systems. Published online in Articles in Advance March 2, 2016., 1. Introduction Software vendors have restricted the availability of patches only to legal users because of piracy concerns. Windows Genuine Advantage from Microsoft and Adobe Genuine Software are examples of [...]

We give an efficient algorithm for computing a Cournot equilibrium when the producers are confined to integers, the inverse demand function is linear, and costs are quadratic. The method also [...]

This paper introduces a class of contest models in which each player decides when to stop a privately observed Brownian motion with drift and incurs costs depending on his stopping [...]

We consider a sequential inspection game where an inspector uses a limited number of inspections over a larger number of time periods to detect a violation (an illegal act) of [...]

A technology firm launches newer generations of a given product over time. At any moment, the firm decides whether to release a new version of the product that captures the current technology level at the expense of a fixed launch cost. Consumers are forward-looking and purchase newer models only when it maximizes their own future discounted surpluses. We start by assuming that consumers have a common valuation for the product and consider two product launch settings. In the first setting, the firm does not announce future release technologies and the equilibrium of the game is to release new versions cyclically with a constant level of technology improvement that is optimal for the firm. In the second setting, the firm is able to precommit to a schedule of technology releases and the optimal policy generally consists of alternating minor and major technology launch cycles. We verify that the difference in profits between the commitment and no-commitment scenarios can be significant, varying from 4% to 12%. Finally, we generalize our model to allow for multiple customer classes with different valuations for the product, demonstrating how to compute equilibria in this case and numerically deriving insights for different market compositions. Keywords: new product introduction; new product development; strategic consumer behavior; technology products; noncooperative game theory History: Received February 25, 2013; accepted November 24, 2014, by Yossi Aviv, operations management. Published online in Articles in Advance October 15, 2015., 1. Introduction Firms continuously strive to improve the products they sell to their consumers, either by enhancing the quality of their products or by incorporating new features into them. Companies [...]

We investigate the interplay between learning effects and externalities in the problem of competitive investments with uncertain returns. We examine a game theoretic duopoly investment model in which (i) a firm can learn about the profitability of the investment by observing the performance of the first mover and (ii) externalities exist between the investments of two firms. We find a region of a war of attrition between the two firms in which the interplay between externalities and learning gives rise to counterintuitive effects on investment strategies and payoffs. In particular, we find that, contrary to the conventional war of attrition where an increase in benefits for the follower generally delays the first move, an increase in the rate of learning--which tends to benefit the follower--can hasten the first investment. Keywords: games; group decisions; stochastic; decision analysis; sequential; dynamic programming; optimal control History: Received December 11, 2013; accepted January 7, 2015, by James Smith, decision analysis. Published online in Articles in Advance August 18, 2015., 1. Introduction Investment decisions in business, such as the introduction of products in unproven markets or the adoption of unproven technologies, often involve significant uncertainty associated with the market reception [...]

We provide a rationale for the recent burst in the amount of collaborative activities among firms selling complementary products, highlighting factors that may result in a lower profitability for such firms overall. To this end, we examine a game-theoretic model in which firms can collaborate with producers of complementary goods to enhance the quality of the systems formed by their components. Collaboration makes it cheaper to enhance such quality, so building innovation ecosystems results in firms investing more than if collaboration were impossible. In markets reaching saturation, firms are trapped in a prisoner's dilemma: the greater investments create more value, but this does not translate into greater value capture because the value created relative to competitors does not change. We also examine the (dis)advantages for a firm of having open or closed interfaces for the component it sells when the environment is competitive as well as how this is related to the endogenous emergence of two-sided platforms. Keywords: systems competition; complementary products; interoperability; coopetition; exclusivity; endogenous two-sided platform History: Received February 1, 2013; accepted October 9, 2014, by Bruno Cassiman, business strategy. Published online in Articles in Advance July 7, 2015., 1. Introduction The recent decades have witnessed a shift in the competitive paradigm in high-tech industries that is driven to a large extent by the increasing importance of product complementarity. [...]

Although binding reverse auctions have attracted a good deal of interest in the academic literature, in practice, dynamic nonbinding reverse auctions are the norm in procurement. In those, suppliers submit price quotes and can respond to quotes of their competitors during a live auction event. However, the lowest quote does-not necessarily determine the winner. The buyer decides after the contest, taking further supplier information into account, on who will be awarded the contract. We show, both theoretically and empirically, that this bidding format enables suppliers to collude, thus leading to noncompetitive prices. Keywords: bidding; procurement; reverse auctions; multiattribute auctions; behavioral game theory; experimental economics History: Received April 14, 2014; accepted November 17, 2014, by Teck-Hua Ho, behavioral economics. Published online in Articles in Advance August 5, 2015., 1. Introduction In nonbinding reverse auctions, bidders compete against each other like in a standard reverse auction, but the winner is not necessarily the supplier with the lowest bid. Rather, [...]

We experimentally investigate a repeated 'inspection game' where, in the stage game, an employee can either work or shirk and an employer simultaneously chooses to inspect or not inspect. The unique equilibrium of the stage game is in mixed strategies with positive probabilities of shirking/inspecting while combined payoffs are maximized when the employee works and the employer does not inspect. We examine the effects of allowing the employer discretion to sanction or reward the employee after observing stage game payoffs. When employers have limited discretion, and can only apply sanctions and/or rewards following an inspection, we find that both instruments are equally effective in reducing shirking and increasing joint earnings. When employers have discretion to reward and/or sanction independently of whether they inspect, we find that rewards are more effective than sanctions. In treatments where employers can combine sanctions and rewards, employers rely mainly on rewards, and outcomes closely resemble those of treatments where only rewards are possible. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2124. Keywords: inspection game; costly monitoring; discretionary incentives; rewards; punishment; experiment, 1. Introduction In this paper we compare the effectiveness of positive and negative incentives in an inspection game. This game is often used to represent strategic settings characterized by an [...]

Abstract 'Chalk-and-talk' techniques have historically been used as the predominant mode of economic instruction. In fact, until the end of the twenty-first century, deviation from 'chalk-and-talk' was rare and the [...]

We investigate a game of singular control and strategic exit in a model of competitive market share control. In the model, each player can make irreversible investments to increase his [...]

In this paper, we analyze the optimal introduction timing of a seller's products targeted at segments that differ in their willingness to pay for quality. Past studies suggest that an introduction sequence of a high-quality product followed by a lower-quality version of the product may mitigate the cannibalization effects of the low-quality product on profits from the high-quality product. We show that if customers who value quality more possess an outside option such as a substitute product, as may be the case with replacement buyers, a seller may find it optimal to follow a low-quality product with a higher-quality one, the latter being targeted at replacement buyers. Furthermore, the ability of the seller to commit to future qualities accentuates the sequential increase in quality in the presence of such buyers. Thus, we show that conditions other than uncertainty or technological improvements occurring over time may justify a seller adopting a strategy of sequentially increasing quality. Keywords: new product introduction; game theory; marketing strategy; market segmentation; product differentiation; durable products; pricing History: Received April 16, 2012; accepted May 15, 2014, by J. Miguel Villas-Boas, marketing. Published online in Articles in Advance October 31, 2014., 1. Introduction How should a seller introduce products that vary in their quality or functionality? Should the seller introduce these products simultaneously or sequentially, and if the latter, in what [...]

In markets where buyers and suppliers negotiate, supplier costs, buyer willingness to pay, and competition determine only a range of potential prices, leaving the final price dependent on other factors (e.g., negotiating skill), which I call bargaining ability. I use a model of buyer demand and buyer-supplier bargaining, combined with detailed data on prices and quantities at the buyer-supplier relationship level, to estimate firm-bargaining abilities in the context of the coronary stent industry where different hospitals (buyers) pay different prices for the exact same product from the same supplier. I estimate that (1) variation in bargaining abilities explains 79% of this price variation, (2) bargaining ability has a large firm-specific component, and (3) changes in the distribution of bargaining abilities over time suggest learning as an important channel influencing bargaining ability. Data, as supplemental material, are available at http://dx.doi.org/10.1287/innsc.2014.2006. Keywords: economics; game theory; bargaining theory; healthcare; industrial organization; market structure; firm strategy; market performance; microeconomics; market pricing History: Received March 23, 2013; accepted December 16, 2013, by Bruno Cassiman, business strategy. Published online in Articles in Advance October 17, 2014., 1. Introduction 'In business, as in life, you don't get what you deserve, you get what you negotiate,' reads the ubiquitous airline magazine advertisement of Chester L. Karrass, whose company [...]

Abstract This paper analyzes strategic interactions and contagion effects in the peripheral countries of a monetary union. Using game theory and cost-benefit analysis, the paper determines the set of equilibrium [...]

We study dynamic price competition in an oligopolistic market with a mix of substitutable and complementary perishable assets. Each firm has a fixed initial stock of items and competes in setting prices to sell them over a finite sales horizon. Customers sequentially arrive at the market, make a purchase choice, and then leave immediately with some likelihood of no purchase. The purchase likelihood depends on the time of purchase, product attributes, and current prices. The demand structure includes time-variant linear and multinomial logit demand models as special cases. Assuming deterministic customer arrival rates, we show that any equilibrium strategy has a simple structure, involving a finite set of shadow prices measuring capacity externalities that firms exert on each other: equilibrium prices can be solved from a one-shot price competition game under the current-time demand structure, taking into account capacity externalities through the time-invariant shadow prices. The former reflects the transient demand side at every moment, and the latter captures the aggregate supply constraints over the sales horizon. This simple structure sheds light on dynamic revenue management problems under competition, which helps capture the essence of the problems under demand uncertainty. We show that the equilibrium solutions from the deterministic game provide precommitted and contingent heuristic policies that are asymptotic equilibria for its stochastic counterpart, when demand and supply are sufficiently large. Keywords: revenue management; oligopoly; dynamic pricing; open-loop; feedback strategy; differential game; stochastic game; approximate dynamic programming History: Received September 22, 2011; accepted August 8, 2013, by Yossi Aviv, operations management. Published online in Articles in Advance January 17, 2014., 1. Introduction Providers of perishable capacities, such as airlines, compete by setting prices to sell fixed capacities over a finite sales horizon. Online travel sites, such as Expedia, gather information [...]

We experimentally test for the effect of social status on the likelihood of partnership formation. We consider a two-player game where the opportunity to perform a hidden action by one player may render partnership formation difficult. In this context, we study how the assignment of partners' status to the top, middle, or bottom position of a preexisting status hierarchy affects collaboration. We find that partnership formation is remarkably sensitive to the partners' status affiliations. Collaboration is easiest when both partners share the same social status, and the probability of partnership formation decreases significantly as the status gap between the partners increases, entailing massive inefficiency. Keywords: partnership; status; laboratory experiment History: Received March 10, 2013; accepted July 24, 2013, by Uri Gneezy, behavioral economics. Published online in Articles in Advance January 17, 2014., 1. Introduction Most economic undertakings involve forming a successful partnership. Partnership formation lies at the heart of contract theory, which analyzes how partnerships are formed, what types of contracts foster [...]

In this paper, we study how social planners should exploit social comparisons to pursue their objectives. We consider two modes of social comparison, referred to as behind-averse and ahead-seeking behaviors, depending on whether individuals experience a utility loss from underperforming or a utility gain from overperforming relative to their peers. Modeling social comparison as a game between players, we find that ahead-seeking behavior leads to output polarization, whereas behind-averse behavior leads to output clustering. A social planner can mitigate these effects in two ways: (i) by providing the full reference distribution of outputs instead of an aggregate reference point based on the average output and (ii) by assigning players into uniform rather than diverse reference groups. Social planners may thus need to tailor the reference structure to the predominant mode of social comparison and their objective. A performance-focused social planner may set the reference structure so as to maximize the output of either the top or the bottom player depending on whether she puts greater marginal weight to larger or smaller outputs. When the social planner also cares about utility, she faces a dilemma because performance optimization may not be aligned with utility maximization. Inevitably, the social planner will have to confront equity issues because better performance may not reflect greater effort or greater ability. Keywords: social comparisons; reference points; behavioral operations; noncooperative game theory History: Received May 17, 2012; accepted March 13, 2013, by Serguei Netessine, operations management. Published online in Articles in Advance September 3, 2013., 1. Introduction In many social contexts, people exhibit a natural tendency to compare themselves with their peers. Furthermore, the amount of effort individuals put into an activity may be driven [...]

We study the effect of consultative participation in an experimental principal-agent game, where the principal can consult the agent's preferred option regarding the cost function of the transfer to be implemented in the final stage of the game. We show that consulting the agent was beneficial to principals as long as they followed the agent's choice. Ignoring the agent's choice was detrimental to the principal because it engendered negative emotions and low levels of transfers. Nevertheless, the majority of principals were reluctant to change their mind and adopt the agent's proposal. Our results suggest that the ability to change one's own mind is an important dimension of managerial success. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1786. Keywords: organizational behavior; participative decision making; principal-agent model History: Received February 24, 2012; accepted March 18, 2013, by Teck-Hua Ho, behavioral economics. Published online in Articles in Advance October 30, 2013., 1. Introduction Employees' participation in the decision-making process is a widely used managerial tool that has been studied at length in the last 50 years in the management literature (Allport [...]

Many firms today manage their existing customers differentially based on profit potential, providing fewer incentives to less profitable customers and firing unprofitable customers. Although researchers and industry experts advocate this practice, results have been mixed. We examine this practice explicitly accounting for competition and find that some conventional prescriptions may not always hold. We analyze a setting where customers differ in their cost to serve. We find that when a firm can discriminate among its customers but the rival cannot, customer base composition influences the rival's poaching behavior. Consequently, even though a low-cost customer is more profitable when viewed in isolation, a high-cost customer may be strategically more valuable by discouraging poaching. Therefore, contrary to conventional advice, it can be profitable for a firm to retain unprofitable customers. Moreover, some customers may become more valuable to retain and receive better incentives when they are less profitable. We further show that, in competitive settings, traditional customer lifetime value metrics may lead to poor retention decisions because they do not account for the competitive externality that actions toward some customers impose on the cash flows from other customers. Our results suggest that firms may need to evolve from a segmentation mindset, which views each customer in isolation, to a customer portfolio mindset, which recognizes that the value of different customers is interlinked. Keywords: competitive strategy; customer lifetime value; customer profitability; customer relationship management; dynamic competition; price discrimination; game theory History: Received September 27, 2012; accepted April 22, 2013, by J. Miguel Villas-Boas, marketing. Published online in Articles in Advance October 7, 2013., Some of my clients now tell me they're sorry they listened to consultants five years ago when we told them to get rid of unprofitable customers.... Today, they're saying, 'To [...]

This paper studies the design of group-buying mechanisms in a two-period game where cohorts of consumers I arrive at a deal and make sign-up decisions sequentially. A firm can adopt [...]

In this paper, we show that slotting fees can be part of an equilibrium solution if per-unit downstream margin is smaller than the per-unit upstream margin. In recent literature, a [...]

In the majority of developed countries, the level of influenza vaccination coverage in all age groups is sub-optimal. Hence, the authorities offer different kinds of incentives for people to become [...]

Institutional theory implies that normative societal expectations create pressures for organizations to respond acceptably to important institutional constituents. Although the role of the institutional environment on marketing has been studied, the organizational mechanisms by which firms respond to societal pressures remain under-investigated. We suggest that an important determining factor involves organizational identity, which drives firm response to societal norms and facilitates its quest for legitimacy. Accordingly, this study contributes to organizational theory in marketing by casting identity as the focal mechanism in the firm's response to the institutional environment. Marketing ethics and CSR issues frame this research given natural synergies with institutional and organizational identity theories and evidence that increasingly, firms must respond to societal expectations involving ethics in their marketing practices. Using game theoretical models and economic experiments, we find that the influence of the institutional environment emerges through firm identity, affecting resource allocation to ethical product augmentation. Keywords Institutional theory * Organizational identity theory * Marketing ethics * Corporate social responsibility * Game theory * Experimental economics, Introduction Institutional theory implies that social norms and institutional expectations create pressures for organizations to conform or to respond in a manner acceptable to important societal constituents (DiMaggio and Powell [...]

Economists and psychologists have documented patterns of individual decision-making behavior (e.g., loss aversion) whereby losses and gains are treated differently. However, there has been little evidence of such patterns in multiplayer games. I report results showing the strongest evidence I know of that this phenomenon is present in games. Experimental subjects play two hawk-dove games that are identical up to a constant; in one, all payoffs are positive, while in the other, payoffs are negative if and only if both players choose 'hawk.' Under both fixed pairs and random matching, differences between the games are substantial, significant, and consistent with loss aversion. JEL Classification: D81, C72, C73, 1. Background Game-theoretic solution concepts imply that a change in payoff levels modifying a game by adding a constant to all payoffs--should not affect behavior as long as payoffs reflect [...]

Companies and managers are apt to forget information, yet classic game theory analysis assumes that all players have perfect recall. This paper expands the literature by examining how introducing forgetfulness into a multiplayer game-theoretic framework can help or hinder cooperative behavior. We find that forgetfulness impacts the ability of firms to cooperate in countervailing directions. On one hand, forgetfulness can diminish the ability to punish deviators, making cooperation more difficult. On the other hand, under some conditions forgetfulness can make meting out severe punishments--even below-(stage) minimax punishments--credible and decrease the ability for players to effectively deviate, facilitating cooperation even in circumstances where cooperation cannot be sustained under perfect recall. We apply our model to a number of strategic games that commonly appear in the literature. Key words: marketing; competitive strategy; games-group decisions; information systems; IT policy and management History: Received January 19, 2009; accepted September 28, 2010, by Preyas Desai, marketing. Published online in Articles in Advance December 10, 2010., 1. Introduction Although the game theory literature classically assumes perfect recall, players in business games often forget the past. This forgetfulness occurs partly because of the imperfect behavior of people, [...]

This paper analyses a wholesale electricity market with supply function competition. Trade in the forward and spot markets is represented by a two-stage game, and its subgame perfect Nash equilibrium [...]