No abstract

When deciding whether to adopt an innovative product or service, consumers often experience different levels of anxiety (i.e., nervousness) that prompt them to resist purchase (e.g., fear of learning new technologies, disruption of established habits or beliefs). In such cases, consumers’ anxiety is mitigated by “validation” through externality (e.g., the number of early adopters). To reduce consumers’ anxiety, firms can also invest in “familiarization” through promotion (e.g., offering free trials). We conceptualize innovation as a product that engenders anxiety, and present a model that employs a consumer utility model focusing on the psychological dimension. We examine the firm's profit‐maximizing promotion and pricing decisions when selling to forward‐looking consumers in the presence of externality. Our equilibrium analysis reveals that, unlike the conventional wisdom for promoting new products, for anxiety‐inducing innovations with externality, accelerating the speed of adoption through promotion can actually be detrimental to the firm.

Because of the informational advantage of online marketplaces (i.e., platforms), it is a common belief that a platform’s market entry will be detrimental to third-party sellers who sell similar products on the platform. To examine the validity of this belief, we conduct an exploratory analysis using the sales data for a single product category provided by JD.com for the month of March 2018. Our analysis reveals an unexpected result. Upon the platform’s entry, third-party sellers who sell similar products can afford to charge a higher price, obtain a higher demand, and earn a higher profit. To provide a plausible explanation for this unexpected exploratory result, we develop a duopoly model that incorporates the changing competitive dynamic before and after the platform’s entry. Specifically, before entry, the platform earns a commission (based on the seller’s revenue), whereas the seller sets its retail price as a monopoly. After entry, the platform earns a profit generated by its direct sales in addition to the commission from the seller. In addition, the seller and the platform operate in a duopoly and engage in a sequential game. By examining the equilibrium outcomes associated with this sequential game, we identify conditions under which the platform’s entry can create a win-win situation for both parties. Specifically, these conditions hold when the platform’s market potential is moderate and when the platform’s entry creates a sufficiently high spillover effect on the seller, providing a plausible explanation for our empirical finding that the seller can benefit from a platform’s entry. Funding: W. Wang acknowledges the financial support from the National Natural Science Foundation of China [Grant 72173019], the Beijing Social Science Foundation [Grant 20JJA004], the Chinese Ministry of Education Research Funds on Humanities and Social Sciences [Grant 21YJA790056], and the Excellent Young Scholar Funds of UIBE [Grant 19YQ17].

Facing purchase choice involving ambiguity in product quality, consumers behave in a boundedly rational manner. Consumers also exhibit varying degrees of predisposition toward a product. We present a simple model of boundedly rational choice under ambiguity. The model's key feature is that it captures the interaction between predisposition and ambiguity. We build on the choice model to derive demand curves and the unique equilibrium market outcomes (regarding prices, profits, and market shares) under duopolistic competition. In equilibrium, market shares are proportional to prices. In symmetric competition, higher equilibrium prices obtain when the ambiguity in product quality is high or when the customer base is partisan. For vertically differentiated products, the strategy of a higher-quality firm to marginally reduce ambiguity depends on the ambiguity level inherent in the product-market environment. The presence of informed customers may increase the equilibrium prices and profits of both firms. An understanding of the predisposition-ambiguity interaction may improve the firm's information and brand management strategy.