Chapter 10 - Information and value creation

Question 1

vertical differentiation

Answer 1

firms may enhance the benefit of their product for all consumers

Question 2

horizontal differentiation

Answer 2

firms may alter certain aspects of their product so that some consumers perceive that it offers more benefits than for others

Question 3

disclosure

Answer 3

informing consumers about product benefits –> essential for benefit strategy to succeed

Question 4

certifiers

Answer 4

third parties disclosing products information

Question 5

shopping problem

Answer 5

finding the goods and services that best meet the consumer’s needs

–> find the seller that offers the highest B - P

Question 6

search

Answer 6

the process of finding the seller offering the highest B - P

Question 7

sequentially

Answer 7

learning about one seller at a time

• costly relative to B - P as it usually involves considerable time and travel

Question 8

simultaneously

Answer 8

learning about many products at once, gathering information about many products before deciding

• relatively low research costs compared to B - P

Question 9

search good

Answer 9

consumers can easily compare product characteristics. search goods are often commodities, and consumers choose solely on the basis of price

(e.g., gasoline, copier and printer, batteries)

Question 10

experience good

Answer 10

consumers cannot easily compare product characteristics and value information from others. consumers learn about quality after purchasing and using the product

(e.g., automobiles, consumer electronics, restaurants, …)

Question 11

credence good

Answer 11

consumers cannot easily evaluate quality even after purchasing and using the product

(e.g., some auto repairs, medical services, and educational services)

Question 12

unraveling

Answer 12

all firms, even the worst, will disclose their quality.

this would leave no room for third party certifiers

Question 13

unraveling needs strong assumptions (that are often violated)

Answer 13

• requires sellers to cheaply and accurately assess there own quality and where they stand relative to other sellers
• if the best sellers are unaware, they may not set the unraveling in motion
• consumers have reasonable beliefs about distribution of quality
• sellers may be reluctant to disclose, if they have not previously competed on quality

Question 14

when industries fail to voluntarily disclose quality, …

Answer 14

governments often step in. or they establish minimum quality standards through licensing

Question 15

licensing

Answer 15

licensing sets a quality floor while also raising entry costs and protects incumbents from competition

Question 16

alternatives to disclosure

Answer 16

• warranties

- branding

Question 17

warranties

Answer 17

a promise to reimburse the consumers if the product fails

they also serve as a signal of quality

Question 18

signal

Answer 18

a message that conveys information about vertical positioning

–> a signal is only informative if it is more profitable for the high quality firms to offer the signal

Question 19

branding

Answer 19

helps consumers associate product names with product attributes

Question 20

quality report card

Answer 20

a grade that can be used to evaluate quality (e.g., university rankings)

Question 21

consumers may benefit from rankings in three ways

Answer 21

• consumers can more easily identify high-quality sellers
• elasticity of demand with respect to quality increases
• -> incentive for sellers to improve quality
• some consumers are willing to pay more for quality than others
• -> improve sorting by matching consumers who highly value quality to the best sellers

Question 22

random noise

Answer 22

information/activity that confuses underlying trends

Question 23

selection

Answer 23

if a report card depends on input from the customer, sellers may shun some customers to boost their score

Question 24

multitasking (“teaching to the test”)

Answer 24

when efforts to promote improvements on one dimension of performance are confounded by changes in other dimensions of performance

Question 25

multitasking is a potential problem whenever two things occur simultaneously

Answer 25

- incentive contracts/report cards are incomplete --> they don't cover all relevant aspects of performance - the agent has limited resources that must be allocated across tasks, where different tasks affect different aspects of performance (these two conditions are present for nearly all experience and credence goods)

Question 26

most report cards contain several different quality measures

Answer 26

- outcome - process - input

Question 27

outcome

Answer 27

what consumers ultimately care about. specific measures to the good/services

Question 28

process

Answer 28

does the seller use accepted practices to produce? - useful if outcomes are hard to measure - can promote multitasking by encouraging agents to invest in reported processes but scale back on unreported processes - more common for services than for products

Question 29

input

Answer 29

is labor well trained? does the seller use the latest technologies? - useful if outcomes are hard to measure - promote multitasking by encouraging agents to invest in the reported inputs but scale back on the unreported inputs

Question 30

reasons why it makes sense to report process and input measures of quality

Answer 30

- outcome data may be unavailable - it may be difficult to obtain outcome measure for a large sample (statistical imprecision) - noisy rankings often exhibit mean reversion - difference in outcomes across sellers may reflect differences in the customers rather than differences in seller quality

Question 31

mean reversion

Answer 31

firms with high scores were lucky maybe as the noisiness worked in their favor --> luck tends to even out and its likely that they see their high scores "revert to the mean" in subsequent rankings

Question 32

certifiers should consider using input and process measures when the following conditions hold

Answer 32

- process and input measures are positively linked to favorable outcomes - it is relatively inexpensive to measure process and inputs; the same measures can be obtained from all firms - processes and inputs are not easily manipulated through multitasking

Question 33

a prospective customer who uses customer satisfaction ratings to compare sellers is necessarily relying on a noisy and possibly biased quality measure because

Answer 33

- different customers may use different criteria to measure quality - customers have an incentive to exaggerate their rating to influence the average score - customers may be reluctant to leave negative feedback - it is unverifiable; individuals may offer feedback without having consumed the product

Question 34

customer satisfaction rating may suffer from several other shortcomings

Answer 34

- response rates to voluntary survey are extremely low - motivation bias - survivor bias

Question 35

motivation bias

Answer 35

avid fans and disgruntled customers are disproportionately likely to turn in their surveys

Question 36

survivor bias

Answer 36

surveys of existing customers exempt customers who did not like the product and no longer use it

Question 37

risk adjustment

Answer 37

a statistical process in which raw outcome measures are adjusted for factors that are beyond the control of the seller

Question 38

composite scores

Answer 38

scores that summarize the information in multiple measures - sum up/(weighted) average individual scores --> individual components need to be measured on the same numeric scale

Question 39

certifiers role in vertically differentiated markets

Answer 39

establish and quantify the quality differences across products

Question 40

certification in horizontally differentiated markets

Answer 40

consumers may disagree about product rankings, and a certifier who declares that a given seller is the best will be giving bad advice to many others.