Working Papers

The Dynamic Effects of Bundling as a Product Strategy

Abstract

Several key questions in bundling have not been empirically examined: Do consumers value bundles over and beyond their component products, indicating synergy? Is mixed bundling more effective than pure bundling or pure components? Does correlation in consumer valuations make bundling more or less effective? Does bundling serve as a complement or substitute to network effects? To address these questions, we develop a consumer-choice model from micro-foundations to capture the essentials of our setting, i.e. the handheld video game console market. In doing so, we provide a framework to understand the dynamic, long-term impacts of bundling on demand. We find that hardware sales diminish in the absence of bundling, and consumers who had previously purchased bundles may not always purchase pure consoles, even though consoles may be cheaper than bundles. The type of bundling chosen is critical to extracting value from consumers, with pure bundling performing significantly worse than both mixed bundling and pure components. We find that consumers perceive a negative synergy between the components of a bundle. Modeling the dynamic nature of durable goods purchases also helps us uncover a finding that contradicts prior static models: positive correlation between products enables bundling to be more effective than negative correlation.

Download the paper: http://www.hbs.edu/research/pdf/12-043.pdf

When Smaller Menus Are Better: Variability in Menu-Setting Ability

Abstract

Are large menus better than small menus? Recent literature argues that individuals' apparent preference for smaller menus can be explained by choosers' behavioral biases or informational limitations. These explanations imply that absent behavioral or informational effects, larger menus would be objectively better. However, in an important economic context-401(k) pension plans-we find that larger menus are objectively worse than smaller menus, as measured by the maximum Sharpe ratio achievable. We propose a model in which menu setters differ in their ability to pre-select the menu. We show that when the cost of increasing the menu size is sufficiently small, a lower-ability menu setter optimally offers more items in the menu than a higher-ability menu setter. Nevertheless, the menu optimally offered by a higher-ability menu setter remains superior. This results in a negative relation between menu size and menu quality: smaller menus are better than larger menus.

Download the paper: http://www.hbs.edu/research/pdf/11-086.pdf

Expectations, Network Effects and Platform Pricing

Abstract

In markets with network effects, users must form expectations about the total number of users who join a given platform. In this paper, we distinguish two ways in which rational expectations can be formed, which correspond to two different types of users-sophisticated and unsophisticated. Only sophisticated users adjust their expectations in response to platforms' price changes. We study the effect of the fraction of sophisticated users on platform profits. A monopoly platform's profits are always increasing in the fraction of sophisticated users. The profits of competing platforms in a market of fixed size are decreasing in the fraction of sophisticated users. When market expansion is introduced, the fraction of sophisticated users that maximizes competing platforms' profits may be positive and is strictly lower than 1. We also investigate the possibility of platforms investing in "educating" unsophisticated users. In a competitive environment, such education is a public good among platforms and therefore the equilibrium level is lower than the one that would maximize joint industry profits.

Download the paper: http://www.hbs.edu/research/pdf/12-045.pdf

From Single Deals to Negotiation Campaigns

Abstract

Negotiation scholars typically take the individual deal, or a few linked deals, as the unit of analysis. While analyzing one deal requires a familiar conceptual framework, doing the same for a broader "negotiation campaign" calls for a different focus and set of concepts: how to orchestrate a large number of subsidiary deals, often grouped into modular "fronts," in order to realize an ultimate "target agreement" with sufficient support to be sustainable. For example, generating the backing necessary from several organizational units for a proposed project to be approved may call for a small-scale "internal" negotiation campaign. A final cross-border merger agreement may represent the culmination of a massive negotiation campaign with multiple, related fronts: financial, shareholder, internal corporate, labor, supplier, political, and regulatory. Complex sales with long cycles and many influential parties as well as major diplomatic initiatives may call more for crafting negotiation campaigns than for doing solo deals. Analysis of negotiation campaigns builds on familiar concepts such as linkage and coalition building. In many cases, however, the parties relevant to a campaign as well as the fronts may not be obvious a priori and may represent choice variables rather than givens for the analysis. Beyond identifying and specifying parties and fronts, negotiation campaign analysis and design calls for assessing interdependencies among fronts, deciding on separation v. combination of fronts, parallel v. sequential tactical emphasis, as well as information revelation v. concealment at different stages of the campaign.

Download the paper: http://www.hbs.edu/research/pdf/12-046.pdf

What Makes the Bonding Stick? A Natural Experiment Involving the U.S. Supreme Court and Cross-Listed Firms

Abstract

Using a natural experiment to overcome the empirical challenges facing the debate over the bonding hypothesis, we analyze markets' reaction to a sudden radical change in the law governing U.S.-listed foreign firms. In March 2010, the U.S. Supreme Court signaled its intention to geographically limit the reach of the U.S. antifraud regime. The Court thus excluded the overwhelming majority of investors in U.S.-listed foreign firms from the protection of the U.S. civil liability regime and cast at least partial limitations on the SEC's regulatory authority. This event nonetheless was met with positive abnormal returns of U.S.-listed foreign firms in both home and U.S. markets. These abnormal returns are actually higher the greater the percentage of a firm's capital listed on non-U.S. exchanges but are unrelated to the corporate governance and legal environment in foreign issuers' home country. These results challenge the legal bonding hypothesis while suggesting that the U.S. regime of civil liability as currently designed may not have been seen as a source of economic value for outside investors.

Download the paper: http://www.hbs.edu/research/pdf/11-072.pdf

Does Planning Regulation Protect Independent Retailers?

Abstract

Entry regulations against big-boxes have been introduced in many countries to protect independent retailers. Analyzing a planning reform launched in the U.K. in the 1990s, I show that entry regulations may in fact accelerate the decline of independents by increasing the attractiveness of smaller in-town store formats for retail chains. The causal impact of planning regulation is estimated using variation in local political control across the U.K., which exogenously affects the ease of entry for big-boxes in this specific institutional framework. The analysis shows that up to 17% of the independents' employment decline between 1998 and 2004 can be attributed to the regulatory reform.

Download the paper: http://www.hbs.edu/research/pdf/12-044.pdf

A Reexamination of Tunneling and Business Groups: New Data and New Methods

Abstract

The corporate governance literature of the past decade has focused on identifying drivers of superior or deficient corporate governance. One of the most rigorous methodologies uses firms' reactions to industry shocks to characterize the quality of governance. We propose that this methodology can produce the wrong answer unless one takes into account the different ways in which firms compete (that is, their business strategy). Because macro-level shocks reverberate differently at the firm level depending on whether a firm has a cost structure that requires significant cost adjustment, the quality of governance can only be elucidated accurately by means of simultaneous analysis of firms' business strategy and their corporate governance. Only by acknowledging these differences in cost structure can one determine whether the fruits of a positive macro-level shock have been expropriated by insiders. Using the example of Indian firms, we show that an influential finding is reversed when we take these differences into account. We further argue that the conventional wisdom about tunneling and business groups will need to be reformulated in light of the data, methodology, and findings presented here.

Download the paper: http://www.hbs.edu/research/pdf/10-072.pdf