Preview Provision Under Competition
Presentation
Based on Marketing Science article Xiang, Y., D.A. Soberman. 2011. Preview Provision Under Competition. Marketing Sci. 30(1) 149–169.
Teaching Objective
The insights from this article can be used in courses that relate to competitive strategy, marketing strategy, advertising, and/or integrated marketing communications. The basic idea is to use the S2P slides to show that the information that a firm should provide is not solely a function of what consumers need to know. It is also a function of the information that the competitor provides. The nice thing about the “preview” aspect of the paper is that it clearly precedes the buying decision “by just enough” such that students can easily see how it affects a consumer’s choice.
The main idea is that when a firm does not have complete control of its attributes it may not be offering content that has “maximum appeal”.
When a firm utilizes an uninformative preview, it is believed by consumers to have average content. This is beneficial when a firm does not face competition. However, when a firm faces competition, the situation is different. If two products are perceived to contain average content, then they are not differentiated and price competition is fierce. In contrast, when one firm uses a preview to inform consumers, the products are perceived to be different and this relaxes price competition. In fact, one firm’s decision to utilize informative previews confers a positive benefit on the competitor. This eliminates the incentive for the competitor to use informative previews. As a result, the preview strategies observed in markets like newspapers are often asymmetric.
A good strategy to teach this is to start with the monopoly case and see if students can deduce why a monopolist might choose to use uninformative previews . The basic approach is that if a simple spatial model is used, it is the same argument as to why a monopolistic ice cream seller locates half way down the beach (this comes from the standard Hotelling story used in introductory microeconomics courses). When there is competition, if both ice cream sellers are located in the middle of the beach, price competition is stronger. Students can then be asked to see if they can deduce why only one of the competitors will use informative previews. The reason is that the central location associated with uninformative previews, is a preferred location once a competitor chooses a true location by providing an informative preview.
A complete presentation that describes the model and its mechanics can be found at:
http://www.rotman.utoronto.ca/facbios/viewFac.asp?facultyID=David.Soberman
Keywords: Marketing strategy, advertising, integrated marketing communications.