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Artificial Intelligence and Price Discrimination

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Abstract

The advancements in intelligent technologies are changing the way that consumers search and shop for products. An emerging trend is the use of intelligent home-shopping devices such as Amazon's Alexa which allow consumers to search and order products using voice commands. We study the impact of such artificial intelligence (AI) enabled devices on a brand's distribution channel strategy and its price discrimination across these channels. After making a theoretical breakdown of the functionalities of the AI-enabled shopping devices into (1) adding convenience in ordering procedure ("OC") or (2) providing support in purchase decision making ("DS"), we document via a set of experiments that consumers who have strong (weak) shopping preferences are less-inclined to shop through AI-enabled devices with the functionality of DS (OC) compared to their existing shopping heuristics. The hesitation of the group to adopt AI-enabled shopping devices makes it efficient for a brand operating in a competitive environment to price discriminate across distribution channels. In the second part of the paper, we build an analytical model and derive the equilibrium distribution and pricing strategies for competing brands conditional on the heterogeneity of consumers with respect to their willingness to adopt AI-enabled devices. We also analyze the welfare impact of the introduction of AI technology as a new possible distribution channel.

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We present a framework of durable goods purchasing behavior in related technology product categories that incorporates the following aspects unique to technology product purchases. First, it accounts for consumers' anticipation of declining prices (or increasing quality) over time. Second, the durable nature of technology products implies that even if two categories are related as complements, consumers may stagger their purchases over several periods. Third, the forward-looking consumer decision process, as well as the durable nature of technology products, implies that a consumer's purchase in one category will depend on the anticipated price and quality trajectories of all categories. As a potential aid to future researchers, we also lay out the data requirements for empirically estimating the parameters of our model and the consequences of not having various elements of these data on our ability to estimate the parameters. The data available for our empirical analysis are household-level information on -level first-time decisions in three categories—personal computers, digital cameras, and printers. Our results reveal a strong complementary relationship between the three categories. Policy simulations based on a temporary price decrease in any one category provide interesting insights into how consumers would modify their adoption behavior over time and also across categories as a consequence of the price decrease.
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We empirically examine the trade-off between the benefits of buying online and the benefits of buying in a local retail store. How does a consumer's physical location shape the relative benefits of buying from the online world? We explore this problem using data from Amazon on the top selling books for 1497 unique locations in the US for 10 months ending in January 2006. In particular, we examine what happens when a large bookstore opens and when a discount retailer opens. We show that even controlling for product-specific preferences by location, changes in local retail options have substantial effects on online purchases. When a store opens locally, we find evidence that people substitute away from online purchasing, demonstrating that consumers appear to respond to increased convenience in the offline channel. These estimates are economically large, suggesting that disutility costs of purchasing online are substantial and that offline transportation costs matter. We also show that offline entry decreases consumers' sensitivity to online price discounts. We find no consistent evidence that the breadth of the product line at a local retail store affects purchases although breadth seems to matter in university towns and larger cities. Our paper shows that the parameters in existing theoretical models of channel substitution such as offline transportation cost, online disutility cost, market coverage, and the prices of online and offline retailers interact to determine consumer choice of channels. In this way, our results provide empirical support for many such models.
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Marketers often base decisions about marketing strategies on the results of research designed to elicit information about consumers' preferences. A large body of research indicates, however, that preferences often are labile. That is, preferences can be reversed depending on factors such as how the preference is elicited. In three studies, we examine the effect of familiarity in two preference elicitation tasks, choice and matching judgments. We provide evidence of an interaction between familiarity and response mode (choice or matching) in each study. In study 3, we test the explanation that preference reversals may occur when the interaction of response mode with product-category familiarity leads to systematic changes in attribute weighting. Copyright 1998 by the University of Chicago.
Article
This study examines the effects of decision consequences on reliance on a mechanical decision aid. Experimental participants made planning choices on cases with available input from an actual management fraud decision aid. Participants examined each case, made an initial planning judgment, received the decision aid's prediction of the likelihood of management fraud, and made a final planning judgment. This sequence documents two types of nonreliance: (1) intentionally shifting the final planning judgment away from the aid's prediction even though this prediction supports the initial planning judgment and (2) ignoring the aid when its prediction does not support the initial planning judgment. Results are consistent with a pressure-arousal-performance explanation of the effects of decision consequences on intentional shifting, but do not support any particular explanation of the effects of decision consequences on ignoring.
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This paper shows how firms' pricing and communications strategies may be affected by size of the Internet: firms have incentives to facilitate consumer search on the Internet, but only as long as the Internet's reach is limited. As the Internet is used by more consumers, firms' pricing and communications strategies on the Internet will mirror the strategies they pursue in a conventional channel. Firms can increase their market power by strategically using information on multiple channels to achieve finer consumer segmentation. The paper suggests directions the Internet might take and derives managerial implications. The findings generalize to other channels that allow firms to segment consumers and enable firms to inform consumers at low cost. - 1 - 1 Introduction It has been predicted from early on that the emergence of the Internet as a communications channel would lead to an information explosion. Forbes Magazine, for example, wrote on May 24th, 1994, "The barriers to good inf...
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