In markets with network effects, the value that users gain from platforms depends on the number of other users of the same type who join the same platform (direct network effects) or the number of users of a different type that join (cross-group network effects). Examples include social networks like Facebook or Google+, payment systems like PayPal or Visa, videogame systems like PlayStation 3 and Xbox 360, smartphone platforms like Apple's iPhone or Google's Android, etc. Users typically rely on the media, market reports, or word of mouth to form expectations about the total number of other users that join a given platform. However, most of the time these users are unable to calculate the effect of platforms' prices on adoption by other users. In other words, they do not take price into account when forming expectations. To analyze platform profits, Andrei Hagiu and Hanna Hałaburda model different degrees of user sophistication in forming price expectations in markets with network effects. They show that firms have different preferences regarding the average sophistication of their user base depending on market structure.
Published in 2011
The mere fact that an online video advertisement reaches a viewer's computer screen does not guarantee that the ad actually reaches the viewer. New experimental research by Thales S. Teixeira looks at how advertisers can effectively capture and keep viewers' attention by evoking certain emotional responses.
In just six years, Yelp.com has managed to crowdsource 20 million reviews of restaurants and other services by creating and leveraging an impressive social network of people who enjoy writing reviews. But can a bunch of amateur opinionators working for free really transform the restaurant industry, where heavily marketed chains and highly regarded professional critics have long had a stronghold? To answer this question, HBS professor Michael Luca combined Yelp reviews with revenues for every restaurant that operated in Seattle, WA at any point between 2003 and 2009. Applying a new method to tease out the causal effect of reviews (separate from the effect of underlying quality), the study shows that a one-star increase on Yelp leads to a 5 to 9 percent increase in revenue. Yet Yelp doesn't work for all restaurants. Chain restaurants —which already spend heavily on branding —are unaffected by changes in their Yelp ratings. This suggests that consumer reviews present a new way of learning in the Internet age, and are fast becoming a substitute for traditional forms of reputation.
Why are the U.S. News and World Report College Rankings so influential? According to this paper by Michael Luca and Jonathan Smith, it's at least in part because U.S. News makes the information so simple. While earlier college guides had already provided useful information about schools, U.S. News did the work of aggregating the information into an easy-to-use ranking, making it more salient for prospective students. The authors show that these rankings matter in a big way: a one-rank improvement leads to a 0.9 percent increase in applicants. However, students tend to ignore the underlying details even though these details carry more information than the overall rank.
Retailers, search engines, shopping malls and other intermediaries often deliberately design their physical layouts or e-commerce sites in order to divert customers' attention away from the products they were initially looking for, with hopes that they'll buy a bunch of other products, too. This paper explores various incentives for so-called "search diversion" in a couple of scenarios—when stores internalize their affiliation decisions with intermediaries, and when competition is introduced among intermediaries. Research was conducted by Andrei Hagiu of Harvard Business School and Bruno Jullien of the Toulouse School of Economics.
Companies offering top-drawer customer service might have a nasty surprise awaiting them when a new competitor comes to town. Their best customers might be the first to defect. Research by Harvard Business School's Ryan W. Buell, Dennis Campbell, and Frances X. Frei.
Economists love menus, which can be used to help understand people's choices. For example, do we prefer more choices (larger menu) or fewer (shorter menu)? But the menu itself has to be pre-selected. Research by David Goldreich (Rotman School of Management, University of Toronto) and Hanna Halaburda (Harvard Business School) focuses on the menu setter's decisions about what to include, and how large a menu to construct in the context of 401(k) plan choices.
Companies increasingly involve customers in the design and assembly of products, from Converse allowing customers to design their own shoes to IKEA asking customers to assemble their own furniture. In this paper researchers Michael I. Norton (Harvard Business School), Daniel Mochon (University of California at San Diego), and Dan Ariely (Duke) use the "IKEA Effect" to explain the increase in valuation we place on products we build ourselves. The researchers discuss the implications of the IKEA Effect for marketing managers and organizations more generally.
Many cities encourage residents to sort their domestic trash into separate bins, for the sake of recycling some of it and thus reducing the amount of garbage that ends up in landfills. The problem is that sorting waste is not a fun activity, and not everyone is willing to do it. Using data from 95 municipalities in Italy, this paper discusses whether and how monetary incentives can encourage people to sort their trash. Research was conducted by Alessandro Bucciol of the University of Verona and the University of Amsterdam, Natalia Montinari of the University of Padua and the Max Planck Institute of Economics, and Marco Piovesan of Harvard Business School.
Companies that compete by offering a high level of service are particularly vulnerable to lose customers—even longtime customers—when competitive entrants offer increased service levels, according to new research in the retail banking industry by Ryan W. Buell, Dennis Campbell, and Frances X. Frei, all of Harvard Business School. The good news for providers of high-touch service is that if they can sustain the service advantage over time, they could be rewarded with higher value customers.
In the course of making a decision, managers often err in one of two directions—either overanalyzing a situation or forgoing all the relevant information and simply going with their gut. HBS marketing professor Michael I. Norton discusses the potential pitfalls of thinking too much or thinking too little.
Depositors are overconfident of their chances of recovering demandable deposits in a bank run. In a recent research paper, professor Julio J. Rotemberg reviews various government regulations available to be imposed on financial institutions—minimum capital levels, asset requirements, deposit insurance, and compulsory clawbacks—to understand how much they can help protect investors.
About 95 percent of new products fail. The problem often is that their creators are using an ineffective market segmentation mechanism, according to HBS professor Clayton Christensen. It's time for companies to look at products the way customers do: as a way to get a job done.
For retailers offering deals through the wildly popular online start-up Groupon, does the one-day publicity compensate for the deep hit to profit margins? A new working paper, "To Groupon or Not to Groupon," sets out to help small businesses decide. Harvard Business School professor Benjamin G. Edelman discusses the paper's findings.
Published in 2010
Firms entering a new product market face tremendous ambiguity and competitive uncertainty, particularly when the new market is sparked by radical technological change. Potential customers have little or no experience with products, and during this period of turbulence, firms experiment with alternative product configurations, functions, and technologies. By studying the emergence of the consumer mass market for digital cameras, Carlson School of Management professor Mary J. Benner and HBS professor Mary Tripsas explore what factors influence a firm's initial introduction of product features during the nascent stage of a product market, and how the process of convergence on a standard set of features unfolds. In particular, they assess how a firm's prior industry affiliation influences its conceptualization of the product.
Why do platforms that restrict choice and charge higher prices seem to prosper alongside platforms offering cheap or free unlimited choice? In the online dating market, for example, eHarmony deliberately limits the number of candidates available to its customers. Headhunters show only a few candidates to the companies, and even fewer companies to the candidates. In the housing market, brokers limit the number of houses they show to potential buyers and sellers. In this paper, HBS professors Hanna Halaburda and Mikolaj Jan Piskorski challenge conventional understanding of platform competition and network effects by describing a two-sided matching environment and studying the indirect network effects in this environment. They show that the interplay between more choice and more competition influences the strength of network effects and attractiveness of a platform. Some agents may opt for a platform with few choices to avoid higher levels of competition. The researchers' model helps explain why platforms that limit their choice set coexist (and thrive) alongside platforms that offer greater choice.
What effect does luxury have on human cognition and decision making? According to new research, there seems to be a link between luxury and self interest, an insight that may help curb corporate excesses. Roy Y.J. Chua of Harvard Business School discusses findings from his work conducted with Xi Zou of London Business School.
Published in 2009
Record labels have depended on album sales to boost profits. But in the digital music era, consumers prefer single songs over music "bundles." The result? Harvard Business School professor Anita Elberse says it is time for the industry to rethink its products and prices.
Some of the great financial brands such as Merrill Lynch built trust with customers over decades—but lost it in a matter of months. Harvard Business School marketing professor John Quelch explains where they went wrong, and what comes next.
The willingness by American consumers to adopt new products, processes, and services more rapidly than those in other countries may be the most important enabler of entrepreneurship and innovation in America, says marketing professor John Quelch.
