Customized Products: A Competitive Analysis

148

Abstract"Behavior-based personalization" has gained popularity in recent years, whereby businesses offer personalized products based on consumers' purchase histories. This paper highlights two perils of behavior-based personalization in competitive markets. First, although purchase histories reveal consumer preferences, competitive exploitation of such information damages differentiation, similar to the classic finding that behavior-based price discrimination intensifies price competition. With endogenous product design, there is yet a second peril. It emerges when forward-looking firms try to avoid the first peril by suppressing the information value of purchase histories. Ideally, if a market leader serves all consumers on day one, purchase histories contain no information about consumer preferences. However, knowing that their rivals are willing to accommodate a market leader, firms are more likely to offer a mainstream design at day one, which jeopardizes differentiation. Based on this understanding, I investigate how the perils of behavior-based personalization change under alternative market conditions, such as firms' better knowledge about their own customers, consumer loyalty and inertia, consumer self-selection, and the need for classic designs.

mentioning

confidence: 99%

The Perils of Behavior-Based Personalization

Zhang¹

2011

148

“…Then, employing the scientific method, we reject theories making false predictions. For example, one theory (Syam et al 2005) predicts that, in equilibrium situations, when firms can customize on more than one attribute, we should not observe full customization but we should observe either partial or no customization. We might reject the theory if we observe full customization.…”

Section: Theories and Observationsmentioning

confidence: 95%

Editorial: Errors in the Variables, Unobserved Heterogeneity, and Other Ways of Hiding Statistical Error

Shugan

2006

O ne research function is proposing new scientific theories; another is testing the falsifiable predictions of those theories. Eventually, sufficient observations reveal valid predictions. For the impatient, behold statistical methods, which attribute inconsistent predictions to either faulty data (e.g., measurement error) or faulty theories.Testing theories, however, differs from estimating unknown parameters in known relationships. When testing theories, it is sufficiently dangerous to cure inconsistencies by adding observed explanatory variables (i.e., beyond the theory), let alone unobserved explanatory variables. Adding ad hoc explanatory variables mimics experimental controls when experiments are impractical. Assuming unobservable variables is different, partly because realizations of unobserved variables are unavailable for validating estimates.When different statistical assumptions about error produce dramatically different conclusions, we should doubt the theory, the data, or both. Theory tests should be insensitive to assumptions about error, particularly adjustments for error from unobserved variables. These adjustments can fallaciously inflate support for wrong theories, partly by implicitly under-weighting observations inconsistent with the theory. Inconsistent estimates often convey an important message-the data are inconsistent with the theory! Although adjustments for unobserved variables and ex post information are extraordinarily useful when estimating known relationships, when testing theories, requiring researchers to make these adjustments is inappropriate.

“…The topic of defensive marketing strategy continues to grow with recent publications in many journals including the European Journal of Operational Research (Wilhelm and Xu 2002), the Journal of Consumer Marketing (Gamliel and Herstein 2007), the Journal of Consumer Research (Chernev 2007), the Journal of Marketing Research (Bordley 2003), the Journal of the Academy of Marketing Science (Gruca et al 2002;Shugan 2004Shugan , 2005, Marketing Science (Steenkamp et al 2005, Syam et al 2005, Singh et al 2006, Psychology and Marketing (Klemz and Gruca 2003), Review of Marketing Science (Bayus and Chintagunta 2003), and the International Journal of Research in Marketing (Rhima and Cooper 2005).…”

Section: Academic Literaturementioning

confidence: 99%

Commentary—Defensive Marketing Strategies

Hauser

Shugan

2008

For every new product and service entrant, there are usually many incumbents who must defend their positions in the market. Hence, defensive strategy is as least as critical as new-product strategy. Our 1983 article argued that defensive strategy critically depends on the distribution of buyer preferences and the position of the new entrant relative to the position of the incumbent in a multidimensional attribute space. Since the appearance of our 1983 article in Marketing Science, research in defensive strategy has progressed in both prescriptive and descriptive directions. Subsequent research on defensive strategy has also addressed empirical, methodological, theoretical, and substantive issues. Today, defensive strategy is more important than ever, with shorter new-product life cycles, persistent service innovation, remarkable technological change, global competition, and the invention of new channels of distributions.