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What’s next? June 29, 2007

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At the crossroad again after qualifying exam.  Either past or not.  Feeling kind of lost with what to pursue next.  All these big questions poping up left and right.  Do I really want to become a professor going down the academic road?  Or should I stay in the industry?  What about marriage and kids? 

Angela is having her first baby on Nov.  Julian is turning 2.  Didi is turning 5.   All these kids are growing up so fast.  Most of friends are married with kids.  I am still desparately single.  Still asking the same question that “am I going to get married and have kids someday?” and still no answer…Time keeps flying by and the window keeps shrinking…What should I do next?

The data is such a mess at work.  Between the vendor and IT, couldn’t even get the whole data loaded completely for the longest time.  After Jason moved to the other role, I am sure I will be forced to deal with all these data issues.  Without the cleaned data, I can’t do any of my job at all.  With all the requests pilling up and no data, it’s going to be a diseaster going down the road.  The job is becoming more demanding than in the past.  How long can I hold this job and still go to school at the same time?  Is it time to look for another job?

Completely forgot about Fall tuition coming up, forgot to budget that in before taking the unpaid leave.  Never run so low in my bank account in my whole life.  Hope the next two paychecks will be enough to cover next semester tuition.  Other than my own tuitions, need to start saving for Funny’s master degree tuitions.  I might have to work for another year to build the finanical backup for both of us to get through our education for the next couple years.  Money comes, money goes.  It’s always short…

Financially, I guess I can never be a full time student like everyone else does.  For the stupid PhD degree, another year of laboring myself to death yet to come…!  Damn…they better pass me…I will be so pissed if I fail after all these years….


Back to Work June 26, 2007

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Finally done with the qualifying exam.  Back to work for a week.  So much has changed during my two months absence.  Layoffs, quitting, promotions, new hires, and changing teams and cubes.  All within two months.  Jason is moving to another team on August.  The data is still not uploaded corretly.  Feeling a little shaky on that.  Wondering if I should start sending out resume just in case.  Hope I have enough time to build some backup financially before anything screwing up big time with the project.

Value of Retailing Services June 12, 2007

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–Manufacturers sell a certain good for which consumers have demands

–Retailers sell services in addition to goods.  Retailers sell to final consumers what someone else has made through phsical store or internet.  Retailers exist and operate profitably because they perform a service which their customers value.  The are then compensated through margins by marking-up goods they sell.

According to Bliss (1988), the retailer incurs overhead costs which must be recovered by markups.  The consumers also incur overhead costs in coming to the shop and would incur additional costs if they have to visit more than one shop.  An obvious condition of equilibrium is that all shops should offer equally good vlaue for moeny as measured by the indirect utility function common to all consumers.  A shop offering less good value than others would lose customer, while a shop offering an excess of value could raise some prices and increase its profit.  This is the reason why retailers provide various services along with the good that they sell to consumers.

Services provided by retailers include:

  • advertising
  • labor staffing
  • one-stop shopping
  • assortment
  • convenient location…

Most of these services improve information or cut down on search and transaction costs. Ratchford and Stoops (1992) illustrated that marginal contribution of retail advertising and labor as the marginal reduction in the consumer’s acquisition costs.  They key concept is that retail services will be traded off for increased margins up to the point where marginal saving for consumers is equal to marginal increase in the retailer’s margin.

Although manufacturer might also provide advertising to influence consumer preference, the advertising primarily serves to emphasize product differentiation and hance mostly increases the full price paid by consumers.

Retail Formats:

  • Bentancourt and Gautschi (1990): provide a formal analysis of the retail assortment problem by formulating the retail demand as a function of the underlying demand for various activities involved in the household production.  Based on this view, a household pursing a disaggregated consumption activity like dinner on Christmas eve may choose to shop at a specialty store with a greater depth of assortment than at a convenience store.  Thus, different retail formats exist to satisfy varying demand of the underlying consumption activities
  • Messinger and Narasimhan (1997): develop a model to explain the growth of one-stop shopping and suggests that greater prevalence of one-stop shoping has been a response to growing demand for time-saving convenience

Managing Channel Profits (Jeuland & Shugan 1983) June 12, 2007

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  1. Channel coordination problems occur with all marketing decision variables albeit in different directions.  Without coordination, marketing effort will be smaller than optimum.  This is a generalization of the result concerning margins: without coordination, they will be larger than optimum
  2. Achieving channel coordination can be difficult.  However, several mechanisms do exist for achieving coordination (e.g.  joint ownership, Simple contracts, implicit understand, profit sharing, and quantity discounts)
  3. Many channel phenomena (e.g. integration, contracts) may be implicit coordinating mechanisms
  4. Joint ownership and fixed price contracts are often inadequate mechanisms for coordination
  5. Quantity discounts can provide an optimal means for achieving coordination
  6. Quantity discounts can take the form of other marketing phenomena such as cooperative advertising or added service levels
  7. Quantity discounts are a method of profit sharing
  8. The channel coordination can be separated from the profit division issue.  Although, they are related decisions.
  9. A coordinated channel will make R&M’s margins appear to be too low
  10. Coordination, once achieved, will lead to lower margins, higher levels of marketing effort, lower retail prices and larger total channel profits

Signaling and Screening June 12, 2007

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Two types of information asymmetry:

  1. Hidden action (imperfect information) – Principal tries to induce the agent to take the single appropriate action
  2. Hidden type (incomplete information) – Principal tries to induce the agent to take the action that will reveal his type

Moral Hazard (in the context of hidden actions):

–A form of post-contractual opportunism that arises because actions that have efficiency consequences are not freely observable and so the person taking them may chose to pursue his or her private interests at other’s expenses

Adverse Selection (in the context of hidden types):

–Asymetric information about the pre-contractual information relevant to the transaction between the principal and agent

–The tendency of those in dangerous jobs or high risk lifestyles to get life insurance or seller has information about product quality but buyers don’t

Solutions to asymmetry information:

  1. Hidden actions: The principal develops incentive contracts (Mechanism)
  2. Hidden types: the informed party can use signaling while the uninformed party can use screening

Signaling: Agent conveys some meaningful information about himself to principal (signal before principal offers a contract)

Screening: Principal moves first or suggest a contract and learn agent’s type through his behavior (signal after a contract)


  1. Manufacturer – Retailer: A manufacturer charges higher price or advertise more to convince that his product is in high quality (signaling).  A retailer asks “slotting allowance” to find the type of the product – high/low demand (screening)
  2. Used Car Trade: Seller proposed warranty/build reputation (signaling).  Buyer do a mechanic check on the car (screening)
  3. Education in the labor market: Employee obtains education to show that he is high performance type (signaling).  Employer chooses only graduate students expecting higher performance (screening)

Optimal Search Strategy June 12, 2007

Posted by jyu in Qualifying.

Choice                    A                          B

Probability      0.1      0.9           0.3       0.7

Payoff             $100    $0            $6        $4

Cost                        $5                         $2

The expected payoffs of the two alternatives, without search, are

A: -5+100*0.1+0*0.9 = 5

B: -2+6*0.3+4*0.7=2.6

Supposed we search B first and the A second:

If we see payoff $6 first, then the payoff is -5+(100*0.1+6*0.9)=10.4

If we see payoff $4 first, then the payoff is -5+(100*0.1+4*0.9)=8.6

The expected payoff of this sequential search is

-2+{[-5+(100*0.1+6*0.9)]*0.3+[-5+(100*0.1+4*0.9)]*0.7} =7.14

Suppose we search A first and then B second:

If we see payoff $100 first, then the payoff must be $100 since it is the highest it can get

If we see payoff $0 first, then the payoff is -2+(6*0.3+4*0.7)=2.6

The expected payoff of this sequential search is


Apparently, consumer should search A first and then B second.  The expected payoff of this sequential search is the highest.

Data-Analytics Program and Basket Composition June 12, 2007

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Basket Composition: Using Basket Composition Data for Intelligent Supermarket Pricing (Kumar & Rao MS 2006)


–Stores without information on shopping basket composition end up leaving money on the table when competing for more large-basket shoppers by simultaneously providing a “subsidy” to small basket shoppers.  The dilemma is how to offer higher value to large-basket shoppers but not to the small-basket shoppers.

The authors suggested implementing a data-analytics program so that retailers can acquire information that enables them to price intellegently in the presence of basket heterogeneity.  The results show that the use of DA program enables:

  1. intellegent pricing
  2. better segmentation
  3. higher profits


  1. identifying a good that large-basket shoppers buy but not small-basket shoppers, and lower the price of that good
  2. sending store coupons to their “preferred” customers that offer higher discounts to consumers buying larget baskets

As a result, a DA program allows retailers to compete for large-basket shoppers without subsidizing the small-shoppers too much.

From a practical point of view, supermarkets that have a reward card program are in a good position to implement a DA program. 

  • able to target individual shoppers with rewards
  • more special offers that exploit data-analytics by taking into account the preferences and buying patterns of individual households
  • help in implementing segmentation strategies based not on who has the card, but on purchase patterns
  • better data to improve the pricing through data-analytics
  • provides a true reward to the large-basket shoppers

EG about market evolution and stationarity June 12, 2007

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Evolution is the dominant characteristic for sales and marketing mix spending, but that stationarity is the dominant characteristic for market share.


  1. Sales evolution is more likely to occur at the industry/category level than at the individual brand/firm level
  2. Sales and market share evolution in durables is as likely as in non-durables
  3. Temporal aggregation affects the likelihood of finding evolution
  4. Sales evolution was most freqeuntly observed in the seventies
  5. The longer the sample, the more likely one is to find evolution in sales, but not in market share
  6. There is a significant difference between North America nad Europe in their porportion of evolving sales variables

Promotions are mixed strategies June 12, 2007

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  1. Competitive promotions are mixed strategies
  2. Depth of promotion has a bimodal distribution (on more limited data)

Competitive promotions are mixed strategies:

  • First an empirical regularity is established that promotions are independent across competitors.
  • This regularity is then elaborated on in the context of a promotion game
  • The promotion game is linked to observable outcomes, and a classification of possible situations is developed.  In particular, the classification includes the prisoners’ dilemma, battle of the sexes, and marketing models of promotion competition
  • The evidence for the generalization comes from a variety of product markets, spanning trade promotions, retail price reductions and retail promotions such as advertised specials.  The product markets include coffee, baby diapers, toilet tissue, saltines, dishwashing fluid, ketchup and detergents among others

EG of the effects of deals and promotions June 12, 2007

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  1. Temperal retail price reductions substantially increase sales
  2. Higher market share brands are less deal elastic
  3. The frequency of deals change the consumer’s reference price (if a product is promoted heavily – discounted deeply and promoted frequently – the consumer’s reference price of the product decreases.  The consumer will then buy less of the product at regular price because his or her reservation price has decreased correspondently)
  4. The greater the frequency of deals, the lower the height of the deal spike
  5. Cross-promotional effects are asymmetric, and promoting higher quality brands impacts weaker brands (and price label products) disproportionately. (brand 1 can capture significant share from brand 2 – hence the asymmetry – since brand 1 can use promotions more effectively than brand 2.  Brand 2 cannot easily retaliate because of the asymmetry in promotional response.)
  6. Retailers pass-through less than 100% of trade deals (some portion of funds spent by manufacturers to stimulate retailer promotion is pocketed by the retailer to enhance their profits.)
  7. Display and feature advertising have strong effects on item sales
  8. Advertised promotions can result in increased store traffic
  9. Promotions affect sales in complementary and competitive categories