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Flashcards in HBX- Economics 2 Deck (61):
1

Surveys: Advantages/Disadvantages

Advantages

  • You can get large-scale data.
  • You can survey a broad pool of consumers.
  • You can elicit aggregate preferences.
  • You can do it relatively cheaply.

Disadvantages:

  • People can lie! Ace tkts
  • The way questions are framed. Southwest Ex 2 below
  • One of the most common mistakes in surveying is to survey the wrong people. Boon survey in the mall- ex 3
  • The problem with surveys is that you will get answers, but you won’t necessarily know what they mean.
     

Ex: How to price Apple’s new product- an iPid.
???? Don’t know what it is yet! And people don’t know what it’s worth!
“A lot of times, people don’t know what they want until you show it to them.” Henry Ford went a step further nearly 100 years earlier: “If I had asked people what they wanted, they would have said faster horses.”

 

Ex 2: Should Southwest Airlines take the results of the survey to mean that they should start offering free meals on their flights? Why or why not?
It’s not what Southwest’s business model is! To understand this, think about what makes travel on Southwest Airlines so attractive to its customers: low fares, frequent arrivals and departures, and few delays. This is what Southwest competes on—relentlessly.
Instead say: "would you rather have free meals on board or $20 lower fares?" Or, "would you like to have free meals on board if it meant 30% less frequent departures?" Framed that way, the answers might suddenly be quite different, and more informative.


Ex 3: Boon Technologies wants to gauge demand for its new office productivity application. The company surveys a random group of people at a downtown mall on Wednesday in the middle of the afternoon, offering them a choice of either a free one-month trial of the new software or a $50 gift certificate good anywhere in the mall. Can Boon Technologies conclude that 90% of their target consumers would not be willing to pay $50 for their product? Why or why not?

2

Is the following statement true or false?

When administering a survey, the most important thing is how many responses one gets, not whom those responses are from.

False

It is important to survey the correct group (e.g., existing consumers vs targeted others, etc). Getting a large number of responses from a biased customer group may be useless.

3

  • A respondent who said $100 is surely willing to pay more than a respondent who said $50.
  • No one's true willingness to pay is above $100.
  • The true average willingness to pay of respondents is $75.
  • The true average willingness to pay of respondents could be greater than $80.

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  • A respondent who said $100 is surely willing to pay more than a respondent who said $50.
    • Consumers may lie about their WTP, or they may not, and different consumers' responses may be inaccurate to different degrees.
  • No one's true willingness to pay is above $100.
    • Respondents have an incentive to lie, so it is possible that some of them have a WTP above $100.
  • The true average willingness to pay of respondents is $75.
    • Respondents have an incentive to lie, so we cannot draw conclusions about their true WTP.
  • The true average willingness to pay of respondents could be greater than $80.
    • Respondents have an incentive to lie, so it is possible that their true average WTP is higher than indicated by their responses.

4

You run an ice cream chain, and decide to conduct a survey to gauge which flavors your customers prefer. You ask the respondents to rank three flavors: vanilla, chocolate, and strawberry. The results are:

50 people ranked: (1) vanilla (2) strawberry (3) chocolate

100 people ranked: (1) chocolate (2) vanilla (3) strawberry

What proportion of the respondents prefers vanilla over chocolate?

33%

33% of respondents ranked vanilla higher than chocolate, and because we have asked customers their relative rankings, rather than their true WTP, they are unlikely to lie.

5

You want to market your brand of apparel to a younger demographic. To find out more about consumers’ tastes, you are thinking of conducting a survey. Which type of survey would be most effective in this case?

  • A survey of your customers asking which of your products they like best
  • A survey of your customers asking which products they would like to see more of
  • A survey of local teenagers asking how they choose which products to purchase
  • A survey of a representative slice of the general population asking which types of products they prefer

A survey of local teenagers asking how they choose which products to purchase

  • Since the goal is to target a younger demographic, the survey should focus on younger respondents rather than existing consumers or the general population.

6

Advantages of a Focus Group

  • you can ask follow-up questions.
  • You can get more detail.
  • You can pursue your hunches.
  • You can rephrase the question to emphasize a different aspect of it, all in real time.

7

The best market research tends to use _______

The best market research tends to use both surveys and focus groups.
 

Surveys can provide large amounts of information and that information is in a consistent format, so it can be analyzed statistically.  Focus groups provide more detail and nuance, and the questions can be adjusted in real time. They give you a chance to quickly find out if respondents are misunderstanding the survey questions.
 

Focus groups can yield rich qualitative data, but surveys have an advantage of large-sample quantitative data that can be more easily analyzed.  Focus groups are much more time-consuming than a simple survey. Furthermore, it requires more skill, training, and experience to run them well. In contrast, a survey can easily be done over the web or on the phone.

8

Selection Bias

In sampling and survey design, selection bias occurs when the sample under consideration is not representative of the population of interest.

 

Only choosing customers for surveys that already use your product. In sampling and survey design, selection bias occurs when the sample under consideration is not representative of the population of interest.

Ex:

  • Car Dealership- reachout to people that DIDN’T buy the car
  • Airline- People that fly similar routes, but never choose your airline.

9

Would you want a survey or focus group to answer the question below. 

TO REDUCE CONSUMER MISREPRESENTATION OF WTP

Focus Group

Since focus groups allow for follow-up questions, it is harder to misinterpret participants' responses. 

10

An airline conducting a focus group learns that consumers would rather have more frequent delays in flights if it meant that there would be more flights scheduled every day on a given route. What can the airline do with this information? Select all that apply.

  • Determine that its passengers will, on average, welcome more frequent delays in exchange for more scheduled flights.
  • Ask follow-up questions to determine the length of delays that focus group participants would be willing to tolerate in exchange for the more frequent flights
  • Design a follow-up survey asking more consumers how they would make tradeoffs between on-time departures and more scheduled flights.

  • Determine that its passengers will, on average, welcome more frequent delays in exchange for more scheduled flights.
    • The focus group is probably too small a sample size for the airline to draw this conclusion from.
  • Ask follow-up questions to determine the length of delays that focus group participants would be willing to tolerate in exchange for the more frequent flights
    • This is one of the correct answers. Focus groups facilitate immediate follow-up questions to learn more from participants. The third answer is also correct.
  • Design a follow-up survey asking more consumers how they would make tradeoffs between on-time departures and more scheduled flights.
    • This is one of the correct answers. A follow-up survey would help the airline determine whether the results of the focus group can be generalized to the overall population. The second answer is also correct.

11

What 2 Problems do auctions solve....

  • getting consumers to truthfully reveal their willingness to pay and
  • setting prices.

In other words, auctions facilitate transactions in a way that maximizes the “gains from trade” between buyers and sellers. The product is sold to the consumer whose willingness to pay is the highest.

12

Name all types of Auctions

  1. the “open outcry”/english auction auction, where the auctioneer opens the bidding with a minimum price and then each bidder can increase his or her bid. It’s the usual way to sell artwork or rare antiques. It’s also how most charity auctions work.
  2. A second common approach to auctions is where the bids are hidden. In a so-called Vickrey auction/"sealed-bid second-price auction".(named after Columbia University Professor William Vickrey), the highest bidder wins the item, but only pays the amount of the second-highest bid. Sounds weird? It’s actually more common than you think.
    For example, Google AdWords uses a generalized second-price auction mechanism for multiple goods (slots). eBay auctions are also quite similar to Vickrey auctions. After each bid is placed, the auction continues until the highest bidder wins the item and pays roughly the second-highest bid. (One difference from a typical Vickrey auction, however, is that bids can be adjusted as the auction plays out. Therefore, eBay is sort of a cross between an open outcry auction and a Vickrey auction).
  3. Sealed first-price auction- the winner pays her own bid, rather than the second-highest bid. this is exactly the same as the Vickrey auction, only now the winner really has to pay what she bid, not the second-highest bid. Sealed first-price auctions are also common in practice.
    For example, think of buying real estate. It’s also often used in selling oil and gas tracts.
    Under a sealed second-price auction, buyers have every reason to bid truthfully: because the auction charges the winner not her own bid, but the second-highest bid! But in a first-price auction, it doesn't pay to bid exactly your valuation. If you do, and you win the auction, you'll have to pay your bid, which means that you're guaranteed to capture zero value.
    So the revenue in a sealed first-price auction is approximately the same as the revenue in the English auction or the Vickrey auction- In fact, this is a very general, and famous, result about auctions. (For natural reasons, it’s called the “revenue equivalence result,” and it applies to every auction where each buyer's willingness to pay is independent of each other.

 

 

13

English Auction Details

“Open outcry”/English auction

  • at the end of the auction, the seller knows exactly the willingness to pay of all buyers except one—the highest bidder.
  • As more buyers enter the market, the auction performs better and better. With only a few bidders, there’s a good chance that the second-highest WTP (and therefore the highest bid) is still well below the winner’s WTP. The seller might have left a lot of value on the table, though he could never know whether he had or not

14

An art collector is auctioning off three paintings. He has decided to use a sealed-bid second-price auction. The buyers attending the auction are the following:

  • For painting 1: One buyer with a valuation of $100k, and one buyer with a valuation of $120k.
  • For painting 2: One buyer with a valuation of $90k, and one buyer with a valuation of $200k.
  • For painting 3: Two buyers with a valuation of $110k.

What is the correct ranking of the revenues the collector will receive for the three paintings?

Painting 3 > Painting 1 > Painting 2

  • Each painting will sell at the WTP of the second highest bidder.

15

An artist is selling her latest painting. She knows that there are three interested buyers, who value the painting at $500k, $700k, and $800k, respectively. Which of the following methods will generate the most revenue?

  • An English (open-outcry) auction
  • A Vickrey (sealed second-price) auction
  • A fixed price of $750k
  • An English (open-outcry) or a Vickrey (sealed second-price) auction, either of which will yield the same revenue.

An English (open-outcry) auction

  • The English auction will lead to revenues of $700k

A Vickrey (sealed second-price) auction

  • A Vickrey auction will lead to revenues equal to the second-highest valuation ($700k)

A fixed price of $750k

  • The painting will sell at this price, bringing in $750k of revenue.

An English (open-outcry) or a Vickrey (sealed second-price) auction, either of which will yield the same revenue.

  • Although these two auctions will result in approximately the same revenue, neither of them will in this case maximize revenue.

16

if auctions of different types yield the same revenue, why bother having three different types of auctions?

Well, in practice, different auction types can sometimes yield different results.

  • One of the key assumptions that revenue equivalence depends on is that the buyers' valuations are independent of each other. The assumption of independent WTP is also called the “private values” assumption. This means that each bidder’s valuation of the item is his or her own. It is not correlated with how much others would be willing to pay for the same item.
  • This also means that as a buyer, you don’t get any additional useful information by knowing how others value the item - that won’t change your mind about how you value it.
     

17

If a bidder's valuation for an item is influenced by how much others value it, then the ______  auction will typically generate more revenue.

If a bidder's valuation for an item is influenced by how much others value it, then an auction that allows the bidding to be played out over time, such as the English auction, will typically generate more revenue than sealed bid auctions.

 

Seeing others bid high for the item might convince you that the item is worth more than you thought and you might be willing to place a higher bid than you did at first.

18

When is it better to use auctions vs fixed prices for a seller? 

  1. To start, there’s the issue of how informed sellers are about buyer valuations: if the seller knows a lot about WTP, there’s a far better chance he knows what price to directly set. On the other hand, the less information he has about the demand curve, the more sense it makes for a seller to run an auction. As we saw before, most private value auctions generate revenue in the amount of the second-highest bid, which is pretty good if the seller doesn’t know much about what motivated the highest bids.
  2. Whether an auction is likely to generate more revenue than a fixed-price sale is the time it takes. In a fixed price sale, the seller gives the buyer the option to buy the item at a given price, usually immediately. If the buyer chooses to purchase the item, she knows almost immediately whether or not she will receive it. In an auction, however, the buyer likely will not learn whether she will receive the item until the very end. So auctions will be more effective when buyers are not time-constrained. Otherwise their constraints or their impatience might make them decide to buy what they want elsewhere rather than wait to see how an auction plays out. Here's a recent advertisement highlighting that point.
    If a customer wants a product fast, fixed prices are better
  3. Another important consideration is how different the buyers’ WTPs are. Remember the revenue equivalence result? An auction will generate more revenue (and will be more likely to do better than a fixed-price sale) if the buyers’ valuations are relatively close together, since the highest WTP and the next-highest WTP will be close together. As a result, an auction will lead the highest bidder to bid closer to his true valuation. If there are large differences in WTP across buyers, an auction may not be particularly effective in driving up prices.
  4. Fourth, we already saw that several different kinds of auction all yield practically the same revenue if buyers’ valuations are private, but that some types are more effective (for the seller) than others when the various buyers’ valuations are interconnected. For example, if the buyers include experts to whom others will be looking for clues to what is more valuable than they had thought, bidding is likely to go higher than it would have otherwise—which is all to the benefit of the seller. So if the seller knows that buyers’ valuations are interdependent, he might want to use an open outcry auction.

19

How to Avoid the Winner's Curse

One way to avoid the winner’s curse is that in such situations you always want to bid lower than your appraiser's estimate.(HOW MUCH TO SHAVE IT DOWN DEPENDS ON YOUR KNOWLEDGE of your competitors, formulas, etc…)

 

Winner's Curse- A phenomenon that occurs in auctions in which the winner of the auction will tend to pay more for a product or service than its true value; the Winner's Curse tends to occur in auctions for products worth about the same amount to each bidder.

20

The reason that auctions are effective at truthfully revealing buyer WTP is because of ____

The reason that auctions are effective at truthfully revealing buyer WTP is because of competition: bid much lower than your true WTP and you risk losing the product. Bid too high and you risk overpaying if you win it.

21

Revenue Equivalence

The “revenue equivalence” result says that, generally speaking, the design of auctions doesn’t matter: regardless of whether you have an open outcry auction, a sealed-bid second price (or Vickrey) auction, or a sealed-bid first price auction, in every case the winner will pay roughly the WTP of the 2nd highest bidder.
 

The revenue-equivalence result depends on an important assumption: that buyers have private values. In other words, buyers’ WTP are independent of each other. When this condition is violated—for example, if bidder's WTP will rise as they realize that other bidders have high WTP—auction design can matter.

22

Are Auctions better for sellers or buyers?

Auctions are generally better for sellers than for buyers—since the latter are less likely to capture surplus. As a result, buyers may tend to prefer fixed price settings over auctions (and that can lead sellers to prefer using fixed prices as well). Fixed prices are also preferable when sellers already have plenty of information on buyers' WTP, when buyers have very different WTP from each other, or when buyers are time-constrained.

23

 

In which of the following situations would the use of a focus group be preferable to a survey?

  • An ice cream shop wants to find out how many people prefer chocolate over vanilla.
  • A national movie theater chain wants to see if there is a correlation between income and frequency of going to the movies.
  • A coffeehouse is interested in seeing why customers do not like its new French roast.
  • A shoe manufacturer would like to investigate which features of tennis shoes that customers value most.

 
A coffeehouse is interested in seeing why customers do not like its new French roast.
This analysis would benefit from more in-depth qualitative information.

24

Your toy company is looking into launching a new line of dolls and action figures but is unsure if kids these days still actually play with them. As part of your market research, you send out a survey to 1000 households that have purchased toys in the last five years. You also decide to run two focus groups: one group of children ages 4-16 and one group of parents.

Which of the following questions asked in a survey or focus group would be unbiased and allow you to gain reliable information? Select all that apply.

 

  • A survey question asking households, “How much money per month do you typically spend on your children’s happiness?”
  • A focus group question asking children, “How often per week do you play with dolls or action figures?”
  • A survey question asking households, “What fraction/percentage of income do you estimate that your family spends on entertainment in a given month?”
  • A focus group question asking parents, “With which types of toys do your children typically play?”
  • An anonymous survey question asking children, “what’s your favorite toy and why do you like to play with it?

A survey question asking households, “How much money per month do you typically spend on your children’s happiness?”

  • This question is too broad and could be biased. For example, some parents will likely overstate the amount they spend on their children to seem like better parents.

A focus group question asking children, “How often per week do you play with dolls or action figures?”

  • This question could be biased. Younger children are unlikely to be able to estimate the amount of time they spend playing with toys. It might also be the case that children lie about which toys they use and how often.

A survey question asking households, “What fraction/percentage of income do you estimate that your family spends on entertainment in a given month?”

  • This question seems reasonable and could be useful to estimate potential market size.

A focus group question asking parents, “With which types of toys do your children typically play?”

  • This question could be biased. Parents that work during the day might not know what kinds of toys that their kids like to play with. It might also be that parents would want their children to play with more educational toys than they actually do.

An anonymous survey question asking children, “what’s your favorite toy and why do you like to play with it?

  • This question is likely to evoke a truthful response and allow your company see some common features of toys that kids would value.

25

  • An English auction with a bidding increment of $100
  • A sealed-bid first-price auction
  • A fixed price of $12,000
  • All of the above will generate roughly the same revenue.

Q image thumb

 

All of the above will generate roughly the same revenue.

With so few bidders, the sealed-bid first-price auction could generate more or less revenue than the other two methods. As a rule of thumb, however, each of the above methods will generate approximately the same revenues for the seller.

26

 

In which of the following situations is an auction especially effective? Select all that apply.

The buyer is time-sensitive
The seller is time-sensitive
Buyers’ valuations are independent
The seller does not know the WTP of its potential customers.
Buyers’ valuation of the auction item is within a narrow range.

 

In which of the following situations is an auction especially effective? Select all that apply.

  • The buyer is time-sensitive
  • Auctions are better for items that a buyer does not need right away, such as rare items or antiques. Selling necessities or items with an expiration date, such as concert tickets, via an auction would not be particularly effective.
  • The seller is time-sensitive
  • Auctions are effective when a seller needs to sell an item by a certain date. A seller could use a fixed price when he or she is not under time pressure.
  • Buyers’ valuations are independent
  • Auctions are more effective when bidders’ valuations are interdependent—in other words, buyers’ willingness to pay can be forced upwards based on the bids of those they are competing with for access to the item.
  • The seller does not know the WTP of its potential customers.
    • Auctions are good for items for which there is not an easily available market price. The auction format helps the seller to reveal the top buyer willingness to pay.
  • Buyers’ valuation of the auction item is within a narrow range.
    • An auction will be especially effective if buyers’ valuations of the item are close together. This ensures that the sale price will be close to the WTP of the second highest bidder (based on the Revenue Equivalence Result)

27

Revealed Preference

The economic idea that consumer preferences can be inferred from consumer behavior rather than what consumers' claim to prefer/value; an approach to determining consumer willingness to pay based on past consumer decisions.


Don’t ask customers what they want- just look at what they DO. What they’ve done in the past, they’ll most likely do again. Actions speak louder than words! This is Revealed Preference.

28

What is a question you should ask yourself with data?

Are you tracing out different points of the demand curve OR the supply curve??
This is the problem of IDENTIFICATION.


This problem of “missing variables” is one of the core challenges in determining demand or supply. Simply looking at prices or quantities won’t tell you whether the price-quantity relationship captures the demand or supply curve. But if you isolate one feature or variable of your demand or supply, you can actually observe how the resulting prices and quantities vary. The store inventory in the example above shows this concept.

Example: Toys sold during Christmas time. (Data after the fact)
What could be the reason that the data on purchases of toys does not reveal a nice downward sloping demand curve as one might expect?
While this data may tell us how much consumers paid for the toy and for what quantity at each store, it does not tell us how much the consumers would have been willing to pay or what quantity they would have been willing to purchase.
Our picture (the first one below) is therefore incomplete; we know the consumers wanted to buy at least as many toys as they bought, and we know they were willing to pay at least the price that they paid. But their demand and their willingness to pay may actually have been much higher, and we have no way of knowing.
Other things we couldn’t consider:
Were the toys completely sold out or not? People MIGHT have purchased more. Some people may not have gotten a chance!
In the 1st example below, we know that some stores did sell out, but we don’t know if they had the PERFECT amount in stock- or if people would’ve bought more.
NEW GRAPH- SEPARATING TOYS STORE THAT SOLD OUT OF THE PRODUCT!
 

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29

Distinctive features of a good experiment in pricing

 

  1. Avoid Confirmation Bias Gather new information- don't just prove what you believe. Confirmation Bias is  The tendency to look for, notice and favor information that confirms one's pre-conceived notions or beliefs, while also discounting information that goes against one's beliefs; helps explain why investors can be overconfident, politicians might cherry-pick pieces of evidence to support their own stances, or scientists may come to wrong conclusions by only searching for evidence that supports their hypothesis.  Starting with the wrong idea then teaches you something when you disprove that idea. Being right is critical when you make decisions. But when you’re running an experiment, being wrong is often more immediately useful.
  2. Isolate key feature of the hypothesisA second takeaway from this simple “guess the rule” game is that an experiment is much more effective when it properly isolates key features. In this case, instead of varying your guesses wildly each time, it is better to alter a triplet along only one dimension at a time and observe whether it still conforms to the rule.  
    Experimenting with too many features at once can make it difficult to disentangle different effects. So while we want to conduct experiments that can disprove our hypotheses and can help us collect as much data as possible, it is also important to craft clean experiments that help us isolate key features and their individual effects. We want to be sure we are seeing what we are trying to see and that it is not getting mixed up with a lot of other things going on.
  3. Focus on the right question.
    Companies sometimes run experiments indiscriminately instead of focusing on the areas where they can get a lot of value from learning whether their hypotheses were right or wrong. You sometimes hear managers say, “We don’t know what the right answer is on these ten initiatives, so let’s run 10 experiments”—rather than focusing on the most important three initiatives out of the ten.  When designing an experiment, it is imperative to ask yourself clearly what it is that you most want to know, hypothesize what you think the answer is, and then get to work testing that specific hypothesis.
  4. Avoid the problem of missing variables through Random assignment—or "randomization," as it's commonly referred to— gets around one of the central challenges in hypothesis-testing: the problem of “missing variables” that can make it hard to infer what’s really at work.

30

Confirmation Bias

The tendency to look for, notice and favor information that confirms one's pre-conceived notions or beliefs, while also discounting information that goes against one's beliefs; helps explain why investors can be overconfident, politicians might cherry-pick pieces of evidence to support their own stances, or scientists may come to wrong conclusions by only searching for evidence that supports their hypothesis.

31

Which of the following situations does NOT display confirmation bias? Select all that apply.

  • A political campaign aims to gauge voter interest in its candidate by calling registered voters of the same party and asking about their views on the candidate.
 
  • A hotel asks its patrons to fill out a comment card about the aspects of their stay that they enjoyed the most.
  • An investor scans a company's financial statements looking for evidence that the company’s stock is undervalued.
  • A CEO hires an independent third party to develop an anonymous survey assessing her employees’ job satisfaction.
  • A biologist runs an experiment to attempt to invalidate a widely accepted hypothesis about the nuclei of bacteria cells in order to promote an explanation of his own.

  • A political campaign aims to gauge voter interest in its candidate by calling registered voters of the same party and asking about their views on the candidate.
  • By calling only voters from their own party, the campaigners are likely to receive mostly positive feedback about their candidate, falsely reassuring them of his or her chances of winning.
  • A hotel asks its patrons to fill out a comment card about the aspects of their stay that they enjoyed the most.
  • By asking hotel guests only about the positive aspects of their stay, the hotel is failing to extract information on what its customers did not like about their experience. The hotel could better serve its guests, and possibly attract more patrons, by making changes based on the negative feedback it receives.
  • An investor scans a company's financial statements looking for evidence that the company’s stock is undervalued.
  • By only looking for evidence that the company’s share price is below its fair value, the investor is failing to seek out information that could justify the company’s valuation and cause him to lose money if the share price sinks lower.
  • A CEO hires an independent third party to develop an anonymous survey assessing her employees’ job satisfaction.
  • This scenario does not hint at any bias. By asking a third party to conduct the survey and making it anonymous, the CEO will likely be able to obtain truthful information about her workers’ satisfaction with the company.
  • A biologist runs an experiment to attempt to invalidate a widely accepted hypothesis about the nuclei of bacteria cells in order to promote an explanation of his own.
  • By running the experiment explicitly to disprove the hypothesis, the scientist has the incentive to search only for information that goes against it.

32

 

A supermarket would like to test whether a new brand of soda pop sells significantly more/fewer units than the brand currently on the shelves. Which of the following experiments would best help the store test this hypothesis?

  • Place the new brand of soda next to the brand the store currently sells, at the same price, and see if there is a significantly different amount of sales between the two products over a 3-month timeframe.
  • Place the new brand of soda next to the checkout counter, at the same price as the current brand, and see how many customers swap the current brand for the new one on the way out.
  • Place the new brand of soda in the same shelf location as the current brand, at the same price, remove the original brand, and see if there is a significantly different amount of sales from the 3-month average sales of the original soda.
  • Place the new brand of soda next to the brand the store currently sells, at a lower price, and see if there is a significantly different amount of sales between the two.

Place the new brand of soda in the same shelf location as the current brand, at the same price, remove the original brand, and see if there is a significantly different amount of sales from the 3-month average sales of the original soda.

This is the best setup to test the hypothesis. To compare sales figures between the two brands, the supermarket should change only the type of soda being sold, leaving as many variables as possible (e.g. price, shelf location, amount of other brands sold, length of sales period, etc.) the same.

33

 

In what way does randomization help an experimenter to overcome the “missing variables” problem? Select all that apply.

  • Randomization helps to account for systematic differences across groups of interest.
  • Randomization helps to ensure that the impact measured in a treatment vs. control group is due solely to the variable that is manipulated in the experiment.
  • Randomization helps to ensure that the impact on two groups is more or less the same because individuals in either group have an equal chance of receiving the treatment effect.
  • Randomization helps to eliminate the adverse effects of sample selection/selection bias.
  • Randomization does not help overcome the problem of missing variables, but instead helps deal with confirmation bias

  • Randomization helps to account for systematic differences across groups of interest.
    • Randomization helps control for unobserved variables not being measured in the experiment.
  • Randomization helps to ensure that the impact measured in a treatment vs. control group is due solely to the variable that is manipulated in the experiment.
    • Randomization makes it so that the effect of other individual-specific variables, should, on average, cancel out across the treatment and control groups.
  • Randomization helps to ensure that the impact on two groups is more or less the same because individuals in either group have an equal chance of receiving the treatment effect.
    • Randomization has nothing to do with the eventual effect of a treatment on those in the group.
  • Randomization helps to eliminate the adverse effects of sample selection/selection bias.
    • By randomly creating groups, experimenters can avoid biased samples that may result, for example, when individuals select into groups based on observable differences.
  • Randomization does not help overcome the problem of missing variables, but instead helps deal with confirmation bias.
    • This is not true. Confirmation bias involves finding something in an experiment that one expects to find.

34

As previously mentioned by Professor Elon Kohlberg, studies from Angrist et al. and others have found a negative correlation between class size and student performance in reading and math, at least in some specific contexts. Consider running a similar experiment to determine the impact of class size on performance in science and history classes in the United States.

Which of the following variables would be necessary to account for in the experiment to draw a reasonable conclusion? Select all that apply.

Income
Age
Grade Level
Belt Size
Native language
Presence of a learning disability
Gender
Race
Hair Color

ALL except belt size and hair color!

35

 

The Economics for Managers course content team at HBX is trying to determine if there is a relationship between students’ economics backgrounds and their success in CORe. The team decides to test this hypothesis by separating its latest CORe cohort into two groups: one group consisting of students that have taken at least one economics course in the past, and the second group consisting of individuals with no prior training in economics. The team sees that students with some previous economics knowledge tend to do 5% better, on average, on Module Quizzes than those without prior exposure.

What conclusion can the E4M content team draw from this knowledge? Note: The performance data in this question is completely fictional.

  • Individuals with prior economics experience are better CORe students.

  • The more economics courses taken, the better a student will do on a CORe E4M Module Quiz.

  • Students with prior experience in Financial Accounting do better on Module Quizzes than those students without experience in FA.

  • None of the above.

None of the above.

We cannot conclude any of the above. We don’t know if other missing/hidden variables could be responsible for the difference between quiz scores between the two groups of students. For example, students with more prior experience in economics may differ from those with none in other systematic ways (income, gender, type of university attended, etc.).

36

It’s useful to shift the focus from demand for the product to demand for _______of the product.
 

It’s useful to shift the focus from demand for the product to demand for SPECIFIC FEATURES of the product.

So an important question to ask in many settings is not only what customers are willing to pay for a product or whether they’re willing to pay more for yours, but how much customers are willing to pay for each attribute of the product.


Ex: Square Watermelon

 

37

Conjoint Analysis

a way to determine what it is about a product that customers think is worth paying for, worth paying more for, or worth having at the expense of some other feature if they can’t have both. For the manufacturer, it is a way to figure out which product design elements they need to trade off in order to create the most desirable product that can be sold at the most profitable price.
 

Three steps to Conjoint Analysis:

  1. Collect Data from Customers through Pair-wise rankings: First, rather than ask a customer her preference across 27 (or more) different products, the conjoint approach requests a comparison only across two or three offerings at any one time.
  2. Infer values from rankings: Second, rather than asking a customer to fill out her dollar value for each feature-combination, in conjoint analysis we don’t even need to ask her that. Instead, we infer the dollar value she might assign to any product based on her rankings. That sounds easy—but it also sounds too good to be true.  How does it work? Let’s return to the TV example to see the details.
  3. Estimate how many customers would buy the product with particular features.

 

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Conjoint analysis can also be used to _______

Conjoint analysis can also be used to segment customers.

For example, the analysis might reveal that there was one group of customers who really cared about screen size, a second group that valued both screen size and picture quality, and a third group that primarily cared about price. Moreover, the data on customer preferences would tell us who was in each group, and each group's size.

The customer segmentation information is quite useful for a TV manufacturer in figuring out which TV models to produce—and how many of each model. For example, say the data looked like this:

 

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39

Conjoint analysis is particularly useful because (select all that apply):

  • it's an efficient way to assess customers' relative preferences for product features.
  • it can be used for customer segmentation.
  • it can be used in product development decisions.
  • it's got a cool name.

 

  • it's an efficient way to assess customers' relative preferences for product features.
  • it can be used for customer segmentation.
  • it can be used in product development decisions.

40

Part-worths refer to:

  • an implied numeric value that users attach to each feature of a product.
  • a customer's ranked list of product features.
  • the value of each customer type to a seller.
  • the fact that some customers are worth less than others to sellers.

an implied numeric value that users attach to each feature of a product.

  • Part-worths are a way to show consumers' relative preferences for product features numerically.

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192

There are 4*4*3*2*2=192 possible combinations of features.

42

  • The quality offering.
  • The size offering.
  • Revenues will be the same no matter which TV the store introduces.

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  • The quality offering.
    • If the store introduces the quality offering, segments A and B will both choose it over the competing product, leading to 50% of potential customers paying $2000 each.
  • The size offering.
    • If the store introduces the size offering, segments B and C will both choose it over the competing product, leading to 70% of potential customers paying $1000 each.
  • Revenues will be the same no matter which TV the store introduces.
    • The customers' different preferences for the TVs and the different prices of the TVs lead to different revenues depending on which TV the store introduces.

43

Advertising may increase WTP and therefore demand. But whether or not advertising itself increases demand—and, if so, how much it increases demand—depends on _____________

Advertising may increase WTP and therefore demand. But whether or not advertising itself increases demand—and, if so, how much it increases demand—depends on whether the ad reaches the right audience and on how effective it is.

44

What 4 forms can advertising take? 

  1. You might assume that all advertising is designed to persuade.
  2. Informing. The car ad is mostly just putting information out where people can see it.
  3. signaling quality to the customers. We’ll talk more about that a bit later.
  4. Badmouthing

45

Advertising Elasticity of Demand (AED)
 

A measure of the responsiveness of consumer demand for one product or service to a change in advertising expenditures for that product or service; mathematically calculated as the percentage change in quantity demanded for product X, divided by the percentage change in advertising devoted to product X.

 

For example, a one-percent increase in advertising spending might result in a two-percent increase in demand. In this case, the advertising elasticity of demand (or AED, as we'll refer to it from here onward) would be 2%/1% = 2. This number tells us how sensitive demand is to advertising.

we can ask: how responsive is demand for tickets from Ace Ticket to advertising by Ace Ticket? We can also ask: how responsive is demand for tickets (from any firm) to advertising (by any firm in that industry)? Depending on the question we're interested in, one or the other measure is more relevant.

A lower AED means that demand for this industry's products is less sensitive to advertising.
BUT, a low industry AED doesn't imply that advertising is ineffective. It may just mean that advertising is ineffective in drawing new customers to the market. So the goal of increasing demand for your product is equivalent to the goal of decreasing demand for your competitors' products.
 

46

Match each category with its AED level. 

Remember, a lower AED means that demand for this industry's products is less sensitive to advertising. The quantity demanded by customers will change less for every dollar of advertising than it would have changed were the AED higher.

  • beer 
  • wine
  • cigarettes
     
  • 0.00
  • 0.04
  • 0.08

  • 0.00- Beer
  • 0.04- Cigarettes
  • 0.08- Wine 

So advertising for wine is more likely to draw new customers into the wine market than advertising for beer or cigarettes will. For beer, total advertising has pretty much no effect on total beer consumption.


These numbers seem quite low—and yet beer and cigarettes are heavily advertised. Why would a beer or cigarette company advertise if the AEDs for these industries are so low?
Because, in the case of beer and cigarettes, the purpose of ads is not to bring more consumers into the market - it's not to generate more beer drinkers or smokers (although, in the case of cigarettes, it certainly used to be!) Instead, this advertising is a function of competition WITHIN the industry -- for instance, for Miller to poach customers from Budweiser, and vis versa.

47

It's not just the effectiveness of each advertisement that matters, it's also how _______  that can convey information to consumers about your quality.

it's not just the effectiveness of each advertisement that matters, it's also how much you spend on advertising that can convey information to consumers about your quality.

48

Which of the following businesses would likely launch an advertising campaign promoting its industry without mentioning its brand name?

  • A software company that is certain businesses will prefer its new product to its competitors' products, once the businesses know that the new product exists.
  • A single manufacturer that sells the only type of car available in a country.
  • A taqueria located near many other restaurants and hoping to bring in a greater percentage of the potential consumers.
  • A candidate for student body president in an upcoming high school election.

  • A software company that is certain businesses will prefer its new product to its competitors' products, once the businesses know that the new product exists.
    • This company may focus more on informing than on persuading in its advertising, but it will certainly want to promote its own product rather than its industry
  • A single manufacturer that sells the only type of car available in a country.
    • A firm that dominates an industry can advertise without promoting its brand because new consumers in the industry will most likely end up purchasing from the firm anyway.
  • A taqueria located near many other restaurants and hoping to bring in a greater percentage of the potential consumers.
    • This business will want to focus on differentiating itself positively from its competitors in advertisements.
  • A candidate for student body president in an upcoming high school election.
    • Although the candidate might try to encourage students to vote in the election ("promoting the industry") the candidate will most likely also want to tell students who to vote for ("promoting the business/brand").

49

Substitute

A product or service that can replace another product or service; mathematically, the combined willingness to pay for two products that are substitutes is lower than the sum of the willingness to pay for each individual product (i.e. you wouldn't be willing as much to buy both a computer and a tablet as you would to buy either a computer or a tablet separately).

 

Now, what is a substitute? Here's a simple definition:
Customers value your product less when a substitute product exists than when it does not.

50

Complement

Complement: A product or service that can increase willingness to pay for another product or service; mathematically, the combined willingness to pay for two products that are complements is higher than the sum of the willingness to pay for each individual product (i.e. you'd be willing to pay more for both peanut butter and jam together for your sandwich than for each separately).

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51

Many movie-goers like to enjoy a bag of popcorn together with a soda beverage: one without the other is not nearly as satisfying. Suppose that a movie-theatre near you prices a small popcorn at $4.50 and a large popcorn at $6.00. A small drink costs $4.00 and a large drink costs $4.75. However, the theatre also offers a large popcorn and large drink as a packaged deal at $10.25. Which of the following is likely to be true based on the information given?

  • Movie goers consider popcorn and soda to be complements
  • Movie goers consider popcorn and soda to be substitutes
  • Movie goers’ WTP for bundles is less than their WTP for individual goods
  • Movie theaters are not maximizing profits

Movie goers consider popcorn and soda to be complements

  • Based on the statement that movie goers like to enjoy popcorn and soda together, these goods are considered complements.​​

Movie goers consider popcorn and soda to be substitutes

  • Based on the statement that movie goers like to enjoy popcorn and soda together, these goods are not considered substitutes.

Movie goers’ WTP for bundles is less than their WTP for individual goods

  • The fact that the theater chooses to price the bundle at less than the sum of the individual goods does not imply that customers’ WTP for the bundle is less than the sum of the WTP of the individual goods. In fact, since the goods are often consumed together, WTP for the bundle is likely to be higher than WTP for the individual goods.

Movie theaters are not maximizing profits

  • Profit is a function of more than just price; in particular quantity sold and cost of goods sold. Selling the bundle at less than the sum of the two goods may incentivize some consumers who would not have purchased both goods to do so, which could raise the theaters’ profits. Moreover, offering snacks at a discount could increase WTP for movie tickets.

52

Cross Price Elasticity of Demand

A measure of the responsiveness of demand for one product to a change in price of another product; mathematically calculated as the percentage change in quantity demanded for product X, divided by the percentage change in price for product Y. CPEs can be useful in identifying substitutes or complements to a product.

This price increase was enough to make 1,000 satellite users switch over to cable.
This is not a characteristic of one product, but of A PAIR products.

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  • When 2 products are substitutes then the cross price elasticity of demand is ______
  • When 2 products are complements, then the cross price elasticity of demand will be _______ 
  • If 2 products have no relation at all- the cross price elasticity of demand will be _______

 

  • When 2 products are substitutes then the cross price elasticity of demand is positive. 
  • When 2 products are complements, then the cross price elasticity of demand will be negative.  
  • If 2 products have no relation at all- the cross price elasticity of demand will be roughly 0.

54

Knowing what you know now about cross-price elasticity of demand, you should be able to figure out from this data which car is the closest substitute for the Mazda 323. Which is it?

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Chevy Cavalier

The Mazda 323 and the Chevy Cavalier have the highest cross-price elasticity, which means they are the closest substitutes.

55

Looking at the same data, let’s ask which car is the least likely to be a substitute for any of the other cars. Which car has a demand curve that wouldn’t change much no matter how much the price of any other car in this table went up or down?

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BMW 735i

The cross-price elasticities for the BMW 735i are in general closest to 0 for all of the other automobile brands. This means that the BMW 735i is considered least likely to be a substitute by the consumers in the study.

56

Network Effects

A situation in which the value of a product or service is dependent on the number of buyers and sellers; the more buyers and sellers of the product, the greater the network effect and the more value the product creates.

StubHub is an example of a NETWORKED BUSINESS.
NETWORK EFFECTS are an example of INCREASING RETURNS or VIRTUOUS CIRCLES.

 

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57

Suppose that in a certain region, the markets for t-shirts, online social networking, cars, and household appliances are each served by only two competing firms. Of the following four firms, which one is least likely to be successful in the long run?

  • A t-shirt company that sells 25% of the t-shirts in the market
  • An online social network preferred by 30% of consumers
  • A car manufacturer with 25% market share
  • A household appliances store that serves 35% of the market

  • A t-shirt company that sells 25% of the t-shirts in the market
    • This product doesn't exhibit noticeable network effects. As a result, even firms with niche market share can be profitable.
  • An online social network preferred by 30% of consumers
    • The competing firm has already captured 70% of the market. Since online social networks exhibit strong network effects, it is unlikely that the smaller firm will be able to catch up (and if anything, its market share will decrease over time).
  • A car manufacturer with 25% market share
    • This product doesn't exhibit noticeable network effects. As a result, even firms with niche market share can be profitable.
  • A household appliances store that serves 35% of the market
    • This product doesn't exhibit noticeable network effects. As a result, even firms with niche market share can be profitable.

58

Which of the following products or businesses is least likely to benefit from network effects?

  • Friendship bracelets
  • Computer operating system
  • Multiplayer video games
  • National gym chain

National gym chain

  • Gym chains do not benefit significantly from network effects. Aside from slight membership benefits that a frequent traveler might value, customers compare gyms in the same region rather than on a national or international scale. In fact, more members at a gym might convince some customers to frequent another gym instead if they feel the gym is too crowded.

59

What is the main network effect exhibited by Microsoft Word?

  • Breadth of features
  • Intuitive user interface
  • Compatibility with other businesses and users
  • Frequent updates

Compatibility with other businesses and users

  • Compatibility with other business and users helps Microsoft Word enjoy network effects driven by consumers’ desire for software that any business or person can open without compatibility concerns.

60

  • Add a food pouch to its gym offering
  • Decrease the size of its hiking offering from large to medium
  • Increase the price of its gym offering
  • Add additional pockets to its gym offering.
  • Increase the size of its gym offering from small to medium.

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Add a food pouch to its gym offering

  • Adding a food pouch would further satisfy Segment C, allowing the store to drive customers away from its competitor and capture more revenue. However, the addition of the pouch will also steal customers from segment B away from the store's own higher-priced hiking offering, yielding lower revenues overall.

Decrease the size of its hiking offering from large to medium

  • This modification would change the level of satisfaction of some segments, but not increase revenue for the store.

Increase the price of its gym offering

  • While this modification would increase the revenue the store receives on each unit sold, it would also presumably decrease the level of satisfaction each customer received from the product. This would cause Segment C to defect to the store’s competitor, likely decreasing revenues overall.

Add additional pockets to its gym offering.

  • Adding more pockets would further satisfy Segment C, allowing the store to drive customers away from its competitor and capture more revenue.

Increase the size of its gym offering from small to medium.

  • While this modification would further satisfy Segments B and D, it would decrease the satisfaction of Segments A and C, causing revenue to fall as customers in Segment C defected to the store’s competitor.

61

A sporting goods store is trying to decide what type of backpack to introduce into its product line. After performing a conjoint analysis, the store finds that customers generally fall into one of four well-defined customer segments, with average part-worths as shown in the tables below. 20% of customers are in Segment A, 20% are in Segment B, 50% are in Segment C and 10% are in Segment D. These customers, 100 in total, will be deciding between the store's two brands of backpack (either the "gym offering" or the "hiking offering") and a competing store's “school offering” bag.

Which backpack should the store introduce in order to maximize revenues? 

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The gym offering

  • If the store introduces the gym offering, it will capture Segment A, but customers in Segment C will be indifferent between its offering and the competitor’s school offering. Assuming the store captures half of Segment C (25% of all consumers), it would capture 45% of all consumers (45 out of 100) paying roughly $30 each, for revenues of about $1,350.00. Even if all of Segment C happened to choose the gym offering, it would still earn slightly more revenue by offering the hiking backpack.​

The hiking offering

  • If the store introduces the hiking offering, it will capture Segments B and D, 30% of all consumers (30 out of 100) paying roughly $70 each, for revenues of about $2,100.00. This would yield the most revenue for the store.

Introducing either offering will yield the same revenues

  • If the competitor’s product was not on the market, the store would earn approximately the same amount of revenue by offering either of its backpacks. However, because the average consumer in Segment C receives the same utility from purchasing the competitor’s school offering as they do the gym offering, it’s safe to assume that the competitor will attract about half of Segment C. Thus, the store would earn greater revenues by offering its hiking backpack.

Neither product will earn revenue because the competitor’s offering is preferred by all.

  • The competitor’s product is fully preferred by none of the four segments.