Working Papers Series

Papers below are in pdf.

Oksana Loginova

WP 11-08
Advance Selling in the Presence of Experienced Consumers
Oksana Loginova , X. Henry Wang & Chenhang Zeng

The advance selling strategy is implemented when a firm offers consumers the opportunity to order its product in advance of the regular selling season. Advance selling reduces uncertainty for both the firm and the buyer and enables the firm to update its forecast of future demand. The distinctive feature of the present theoretical study of advance selling is that we divide consumers into two groups, experienced and inexperienced. Experienced consumers know their valuations of the product in advance. The presence of experienced consumers yields new insights. Specifically, pre-orders from experienced consumers lead to a more precise forecast of future demand by the firm. We show that the firm will always adopt advance selling and that the optimal pre-order price may or may not be at a discount to the regular selling price.

JEL Codes: C72, D42, L12, M31
Keywords: advance selling, the Newsvendor Problem, demand uncertainty, experienced consumers, inexperienced consumers.

WP 10-08
Mass Customization in an Endogenous-Timing Game with Vertical Differentiation
Oksana Loginova & X. Henry Wang

We study mass customization in a duopoly game in which the firms' products have different qualities. Whether customization choices are made simultaneously or sequentially is endogenously determined. Specifically, the customization stage of the game involves two periods. Each firm either selects its product type in period 1 or postpones this decision to period 2. We show that both quality difference and endogenous timing play important roles in determining the equilibrium outcome. Customization by one or two firms occurs only if the quality difference is sufficiently large. The flexibility of timing in the customization stage sometimes enables the firms to achieve an outcome that is Pareto superior to that if they were constrained to simultaneous customization choices. Although the high quality firm is more likely to customize, in some circumstances the low quality firm can obtain an advantage by becoming the first and only firm to adopt customization.

Updated on July 19, 2011

JEL Codes: D43, L13, C72
Keywords: mass customization, horizontal differentiation, vertical differentiation, endogenous timing

WP 10-07
Competitive Effects of Mass Customization
Oksana Loginova

Earlier theoretical literature on mass customization maintains that customization reduces product differentiation and intensifies price competition. In contrast, operations management studies argue that customization serves primarily to differentiate a company from its competitors. Interactive involvement of the customer in product design creates an affective relationship with the firm, relaxing price competition. This paper provides a model that incorporates consumer involvement to explain the phenomena described in the operations management literature.

Two firms on the Hotelling line compete for a continuum of consumers with heterogeneous brand preferences. An exogenously given fraction of consumers is potentially interested in customization. Consumer benefits from customization are the rewards from a special shopping experience and the value of product customization (better fitting product); these benefits are higher for consumers located closer to the customizing brand. When a consumer purchases a customized product, he incurs the waiting cost. The firms decide whether to offer customization, then engage in price competition. I show that customization increases the "stickiness" of a consumer to the customizing firm, leading to less intense price competition. As mass customization becomes more efficient (the lead time goes down and/or the sunk costs decrease), customization by one or both firms occurs in equilibrium. I perform comparative statics analysis with respect to the fraction of consumers potentially interested in customization.

JEL Codes: D43, L13, C72
Keywords: horizontal differentiation, price competition, customization, brand loyalty

WP 09-05
Brand Familiarity and Product Knowledge in Customization
Oksana Loginova

This paper challenges the assumption commonly used in the theoretical literature
on customization that consumers always get their ideal varieties when they
purchase a customized product. I adopt Hotelling's horizontal diffierentiation model
with two firms competing for a continuum of consumers. Each consumer has a
most preferred variety and possesses a certain level of category-specific knowledge.
Initially, the firms produce standard products located at the end points of the variety
interval. Suppose one of the firms offers customization. Consumers familiar
with the brand can easily transfer their needs into appropriate characteristics of
this brand. Consumers unfamiliar with the brand have difficulty in expressing their
preferences. Category-specific knowledge is crucial here. Knowledgeable consumers
are more capable of analyzing information than less knowledgeable ones, and the
products they design better match their preferences. The game runs as follows.
First, the firms simultaneously decide whether to offer customization, then engage
in price competition. I show that while customization makes the products less differentiated, the frictions introduced into consumer co-design activities relax price
competition. As a result, customization by one of the firms occurs in equilibrium.

JEL Codes: D43, L13, C72
Keywords: horizontal differentiation, price competition, customization, brand familiarity,
product knowledge

Published in International Journal of Economic Theory

WP 09-04
Customization: Ideal Varieties, Product Uniqueness and Price Competition
Oksana Loginova & X.H. Wang

We study customization in the Hotelling model with two firms. In addition to providing ideal varieties, the perceived uniqueness of a customized product contributes independently to consumer utility. We show that only when consumer preferences for uniqueness are high customization occurs in equilibrium.

JEL Codes: D43, L13, C72
Keywords: customization, product differentiation, product uniqueness, price competition

published in Economics Bulletin

WP 09-03
Customization with Vertically Differentiated Products
Oksana Loginova & X.H. Wang

We study an asymmetric duopoly market in which the firms' products are initially differentiated in both variety and quality. Each consumer has a most preferred variety and a quality valuation. Customization provides ideal varieties for consumers but has no effect on product qualities. The firms first choose whether to customize their products, then engage in price competition. For the customization stage we consider two different games: the simultaneous-move game and the endogenous-timing game. In the latter, whether customization choices are made simultaneously or sequentially is endogenously determined. We show that both quality and the timing of customization choices play important roles in determining the equilibrium outcome. Customization occurs only if the quality difference is sufficiently large. Endogenous timing sometimes enables the firms to achieve an outcome that is Pareto superior to that if they were to make their customization choices simultaneously. Although the higher quality firm is more likely to customize, endogenous timing sometimes enables the lower quality firm to obtain an advantage that it would not have in the simultaneous-move game.

JEL Codes: D43, L13, C72
Keywords: customization, horizontal differentiation, vertical differentiation, endogenous timing.

Published in Journal of Economics and Management Strategy

WP 08-15
Customization in an Endogenous-Timing Game with Vertical Differentiation
Oksana Loginova & X.H. Wang

We study customization in a duopoly game in which the firms' products have different qualities. Whether customization choices are made simultaneously or sequentially is endogenously determined. Specifically, the customization stage of the game involves two periods. Each firm either selects its product type in period 1 or postpones this decision to period 2. We show that both quality and endogenous timing play important roles in determining the equilibrium outcome. Customization occurs only if the quality difference is sufficiently large. Endogenous timing sometimes enables the firms to achieve an outcome that is Pareto superior to that if they were to make their customization choices simultaneously. Although the higher quality firm is more likely to customize, endogenous timing sometimes enables the lower quality firm to obtain an advantage that it would not have under simultaneous customization choices.

JEL Codes: D43, L13, C72
Keywords: customization, horizontal differentiation, vertical differentiation, endogenous timing

Substantially revised as WP-1008

WP 08-14
Mass Customization with Vertically Differentiated Products
Oksana Loginova & X.H. Wang

We analyze a duopoly game in which products are initially differentiated in variety and quality. Each consumer has a most preferred variety and a quality valuation. Customization provides ideal varieties but has no effect on product qualities. The firms first choose whether to customize their products, then engage in price competition. We show that in equilibrium either both firms customize, only the higher quality firm customizes, or no firm customizes. Even if customization is costless, the firms might not customize. This happens when the quality difference between the firms is small. We explore how the total welfare changes with the fixed cost of customization. Interestingly, the relationship is not always monotonic. Contrasting with the situation when customization is not feasible, both consumer surplus and total welfare are higher when one or both firms customize.

JEL Codes: D43, L13, C72
Keywords: customization, horizontal differentiation, vertical differentiation

WP 08-06
Exposure Order Effects and Advertising Competition
Oksana Loginova

This paper applies the theories of exposure order effects, developed in the psychology literature, to an industrial organization model to explore their role in advertising competition. There are two firms and infinitely many identical consumers. The firms produce a homogeneous product and distribute their brands through a common retailer. Consumers randomly arrive at the retailer and buy their most preferred brands. The order in which a consumer sees the advertising messages affects his brand preferences. Under the primacy effect the consumer prefers the brand he first saw advertised, under the recency -- the last encountered brand. The equilibrium of the advertising game is characterized separately under the primacy and the recency effects. In the first setting all consumers are initially unaware of the product existence. The equilibrium advertising intensities, remarkably, do not depend on the type of exposure order effect. In the other two settings some consumers have already formed their brand preferences. The primacy and the recency effects give rise to different equilibrium outcomes.

JEL Codes: C73, D11, D43, L13, M37
Keywords: Advertising Order Effects, Primacy, Recency

published in Journal of Economic Behavior and Organization

WP 07-15
Real and Virtual Competition
Oksana Loginova

Although the Internet reduces market frictions by making it easier for consumers to obtain information about prices and product offerings, goods sold by electronic firms are not perfect substitutes for otherwise identical goods sold by conventional stores. Online purchases, due to non-zero shipping time, are associated with waiting costs, and they do not allow consumers to inspect the product prior to purchase. Visiting a conventional store, on the other hand, involves positive travelling costs. A model extending the circular city paradigm with two types of firms, conventional and electronic, is studied. Under the benchmark setting with only conventional firms in the market, each consumer visits the nearest store and purchases the product there. When electronic firms enter the market, an intriguing type of market segmentation may arise. First, each consumer travels to the nearest conventional store to "try on'' the product. Second, conventional retailers increase their prices and sell the good only to consumers who discover that they have high valuations; consumers with low valuations return "home'' and order the good online. In spite of the increased competition from Internet retailers, welfare decreases.

JEL Codes: D43, D81, and L11
Keywords: Electronic Commerce, Oligopoly Pricing, Market Segmentation, Spatial Competition

published in Journal of Industrial Economics

WP 06-08
Peer-to-Peer Networks: A Mechanism Design Approach
Oksana Loginova, Haibin Lu and X.H. Wang

In this paper we use mechanism design approach to find the optimal file-sharing mechanism in a peer-to-peer network. This mechanism improves upon existing incentive schemes. In particular, we show that peer-approved scheme is never optimal and service-quality scheme is optimal only under certain circumstances. Moreover, we find that the optimal mechanism can be implemented by a mixture of peer-approved and service-quality schemes.

JEL Codes: D82, C72
Keywords: peer-to-peer networks, mechanism design
Updated in June, 2007

published in The B.E. Journal of Theoretical Economics under the title “Incentive Schemes in Peer-to-Peer Networks”

WP 05-11
Real and Virtual Competition
Oksana Loginova

While the Internet reduces market frictions by making it easier for consumers to obtain information about prices and product offerings, goods sold by electronic firms are not perfect substitutes to otherwise identical goods sold by conventional stores. Online purchases, due to non-zero shipping time, are associated with waiting costs, and they do not allow consumers to inspect the product prior to purchase. Visiting a conventional store, on the other hand, involves positive travelling costs. A model extending the circular-city paradigm with two types of firms, conventional and electronic, is studied. Under the benchmark setting with only conventional firms in the market, each consumer visits the nearest store and purchases the product there. When electronic firms enter the market, an intriguing type of market segmentation may arise. First, each consumer travels to the nearest conventional store to "try on'' the product. Second, conventional retailers increase their prices and sell the good only to consumers who discover that they have high valuations; consumers with low valuations return "home'' and order the good online. In spite of the increased competition from Internet retailers, welfare decreases.

JEL Codes: D43, D81, and L11
Keywords: Electronic Commerce, Oligopoly Pricing, Market Segmentation, Spatial Competition
Substantially updated in WP07-15

WP 05-10
Competing for Customers' Attention: Advertising When Consumers Have Imperfect Memory
Oksana Loginova

This paper applies the theory of memory for advertising, developed in the consumer behavior literature, to an industrial organization setting to provide insight into advertising strategies in imperfectly competitive markets. There are two firms and infinitely many identical consumers. The firms produce a homogeneous product and distribute their brands through a common retailer. Consumers randomly arrive and are willing to buy one unit of the product. They are unaware of the existence of a particular brand unless they remember an ad describing it. Under "retroactive interference'' consumers remember recently seen ads and forget about ads they saw in the past. Under "proactive interference'' the ability of consumers to recall new ads is hampered by past ad exposure. The equilibrium of the advertising game is characterized for both proactive and retroactive interferences across three strategic settings. In the Simultaneous Move setting, the firms' equilibrium advertising frequencies, remarkably, do not depend on the type of interference. In the Sequential Move and Dynamic settings, proactive and retroactive interferences do give rise to different equilibrium outcomes.

JEL Codes: C73, D11, D43, L13, and M37
Keywords: Advertising, Memory, Forgetting, Competitive Interference
Updated in December, 2006

WP 05-09
Price Experimentation with Strategic Buyers
Oksana Loginova and Curtis R. Taylor

A two-period model in which a monopolist endeavors to learn about the permanent demand parameter of a specific repeat buyer is presented. The buyer may strategically reject the seller's first-period offer for one of two reasons. First, in order to conceal information (i.e., to pool), a high-valuation buyer may reject high prices that would never be accepted by a low-valuation buyer. Second, in order to reveal information (i.e., to signal), a low-valuation buyer may reject low prices that would always be accepted by a high-valuation buyer. Given this, the seller often finds it optimal to post prices that reveal no useful information. Indeed, in the equilibrium where there is no signaling, the seller never charges an informative first-period price. Learning may occur in the equilibrium where there is maximal signaling, but the scope for learning appears to be quite limited even in this case. Indeed, in order to preempt information transmission through signaling, the seller may set a first-period price strictly below the buyer's lowest possible valuation.

JEL Codes: C73, D81, and D82
Keywords: Price Experimentation, Learning, Strategic Rejections.
Updated in December, 2006

published in Review of Economic Design