Field experiments in retailing

Abstract

This dissertation consists of two essays on tactical issues in retailing. The first essay compares the price sensitivity of private label and national brand products. A large-scale field experiment shows that private label demand is less price sensitive than national brand demand. The estimates from the experimental study are then compared with estimates using the same retailer's transaction history. This allows the evaluation of several methods for controlling for the endogeneity of prices in non-experimental studies. Measuring price sensitivity in the historical data without accounting for endogeneity performs poorly. Instrumental variables estimates with commodity prices as instruments and regression discontinuity estimates also differ from the experimental benchmark. However, estimates using wholesale prices as an instrument closely replicate the experimental estimates. These findings indicate that the wholesale price is an effective instrument for retail price. The second essay shows how targeted offers can affect customer search activity. It has become common practice for retailers to personalize direct marketing offers based on customer transaction histories. Targeted email offers featuring products similar to a customer's previous purchases generate higher response rates, but also have the potential to affect customer search behavior. A closely matched offer may encourage a customer to start the search process, leading to increased search activity. Alternatively, providing customers with closely matched offers may weaken their incentives to search beyond the targeted items. In a field experiment using email offers sent by an online wine retailer, targeted offers result in less search activity on the retailer's website. In a second study, transaction data from an online ticket exchange shows that, after receiving targeted offers, customers are less likely to broaden their purchasing to new genres. These findings indicate that targeted offers carry a hidden cost: a decrease in customer exploration and discovery.