Preference Heterogeneity, Consumer Search, & Targeted Marketing

It is a well-known stylized fact in quantitative marketing that consumers are highly persistent in their product choices. Such persistence has typically been rationalized through strong heterogeneity in preferences across consumers. In a recent paper with Ilya Morozov, Xiaojing Dong, and Liwen Hou, we show that even mild preferences for specific products can lead to persistent choices if consumers only evaluate a limited set of options. We show that when data on search and purchase behavior is available, we can disentangle the role of preferences and search frictions and, taking search costs into account leads to smaller estimates of preference heterogeneity. As a consequence there is less scope for targeted marketing.

More details in this twitter thread: "Consumer Search & Heterogeneity"

Flexible Demand Estimation & Optimal Price Setting in Online Retail

Many online retailers sell hundreds of different products, which makes optimal price setting a difficult task that requires the retailer to understand substitution patterns between similar products in their assortment. In a recent working paper (joint with Tomomichi Amano and Andrew Rhodes) we propose a demand model that leverages information on which products consumers tend to search (i.e. browse) together before making a purchase. Such data on search behavior is often collected by online retailers, more abundant than purchase data, and highly informative about product similarity and hence substitutability.

 

The presentation posted here (prepared for the TSE Digital Economics conference) provides an overview of our approach. 

The Impact of Soda Taxes

In our paper on soda taxes (joint with Anna Tuchman and Song Yao) we study how consumers reacted to the Philadelphia soda tax using detailed supermarket scanner data.

 

What do we find?

The tax leads to a 34% price increase and a 46% reduction in sales in Philadelphia. A large amount of cross-shopping to stores outside of Philadelphia offsets more than half of the reduction in sales in the city and decreases the net reduction in sales of taxed beverages to only 22%. We find no significant substitution to bottled water and modest substitution to untaxed natural juices.  

What does this mean for tax policy design?

The current tax of 1.5 cents/oz is close to revenue-maximizing, but a slightly higher tax could lower sales of taxed beverages with only a small loss in revenue. A tax of 3 cents/oz (which was contemplated in Philadelphia) would have shrunk revenue by 70%. We also show that tax avoidance through cross-shopping severely constrains revenue generation and nutritional improvement. Widening geographic coverage will likely generate both more revenue and a larger decrease in the sales of taxed beverages.

The video on the right provides more details on our study ...

Runner-up for Dick Wittink Best Paper Award

My paper “The Impact of Advertising Along the Conversion Funnel” with Song Yao was the runner-up for the Dick Wittink best paper award at the QME journal. In the paper, we analyze advertising effectiveness along the conversion funnel in brick-and-mortar supermarkets using novel “path-tracking” data on consumers’ movement in the store. The interview posted here provides a short summary of our findings.

Harnessing the Power of Social Media

Firms are increasingly trying to tab into social media and have users promote products on their behalf. But how effective is such a marketing strategy? In recent research of mine (with Song Yao and Wenbo Wang), we address this question. The video interview posted on the right provide a summary of our findings.