Professor Eitan Gerstner

General Information

Eitan Gerstner is Professor of Marketing at the Faculty of Industrial Engineering & Management, The Technion - Israel Institute of Technology. He works in the areas of pricing, service marketing, and marketing strategies, and his research appeared in leading marketing and economics journals including the Journal of Marketing Research, Marketing Science, Journal of Service Research, Journal of Business, Journal of Retailing, the American Economic Review, and Quarterly Journal of Economics. His most recent research focuses on pricing under uncertain demand, customer acquisition and referrals, customer service and satisfaction, and on public policy measures to fight obesity and food waste. Professor Gerstner served as an Area Editor of Marketing Science, and is on the editorial board of the Journal of Service Research.

Research Summary

The general objective of my research is to identify and explain marketing phenomena that cannot be easily explained by existing theories, and to create ideas and solutions to help improve marketing practices from the perspective of companies and consumers. The specific researched areas include: Price Discrimination and Price promotions, Price-Quality Relationships, Customer Satisfaction Management, and Service Marketing.

I. Price Promotions

Pricing helps sellers capture back the added value they create, but not all pricing policies should be zero-sum game. Using variable and flexible pricing can help expand sales and lead to win/win results for sellers and consumers. The three research papers described below were aimed at exploring and developing such pricing techniques.

Cyclic Pricing by a Durable Goods Monopolist

In durable good markets consumers enter the market periodically. They may decide to buy the product immediately if they find good value for money, or delay the purchase if they expect the price to drop. A research question of interest is how a monopoly seller should determine prices, given this consumer behavior. Using theoretical analysis, the research shows that when the entering consumers vary in their willingness to pay, it is optimal for the sellers to vary price over time, charging relatively high prices that induce only consumers with high willingness to pay, to buy immediately. Periodically, however, it is optimal to drop the price far enough to sell to an accumulated group of consumers with low willingness to pay.

Profitable Pricing when Market Segments Overlap

Sellers sell identical products at different prices in different markets to profit from price discrimination. To prevent customers to “leak” from the high-price to the low-price market, they create fences between the markets. This research shows that price discrimination can be profitable even under a substantial amount of such leakage. We also show that completely preventing leakage may not be optimal.

Can bait and Switch Benefit Consumers

Under Bait and Switch sellers advertise very low prices but do not keep enough stock on hand to sell to all consumers. This tactic is illegal, but our research shows that in competitive marketing such strategies may not be harmful for consumers. The reason being that utility may be created through in-store promotions of unadvertised products, and price competition is enhanced.

A Theory of Channel Price Promotion

This theoretical piece investigates optimal pricing within a distribution channel. A manufacturer can motivate a retailer to stimulate sales by using three alternative price promotions: (a) A temporary wholesale price reduction for retailers (push price promotions), (b) A rebate directed towards consumers (pull price promotions), or (c) A combination of push and pull price promotions. The research shows that a push/pull combination leads to the highest profit for the manufacturer and motivated retailers to increase sales by passing part of the price promotion to consumers. Retailers and consumers, however, prefer push price promotions. The channel as a whole is better off under pull because this promotion motivates the retailers to expand sales by participating in the promotion.

Contingent Pricing to Reduce Price Risks

Setting price under uncertain demand is very risky when supply is limited. If price is set too low, money is left on the table, and setting price too high drives away potential buyers. Contingent pricing can help reduce profit losses from such risks by making price contingent on whether the seller succeeds in obtaining a higher price within a specified period. If the high price is obtained, the seller can sufficiently compensate low value consumers who agreed to forgo consumption so that high willingness to pay consumers can get the product. Therefore contingent pricing can make the consumers and the sellers better off.

II. Price-Quality Relationship

The relationship between price and quality has puzzled researchers and consumers. While conventional wisdom suggests that higher prices should reflect higher quality (“you get what you pay for”), in practice, sellers often market inferior quality for higher prices. The following two pieces were aimed to explore the price-quality relationship for frequently vs. infrequently purchased products and to understand the impact of product brand vs. objective quality on prices for frequently purchased products.

Do Higher Prices Signal Higher Quality?

The theory of price signaling has attempted to explain theoretically why in equilibrium higher prices serve as signals for higher product quality. This research shows that in practice price is a poor signal of product quality as evaluated by experts. Therefore price may not be a reliable signal of quality, and other important factors such as brand image and subjective quality judgments play important roles when marketers decide about the prices they should charge.

The Effects of Expert Quality Evaluations versus Brand Name on Price Premiums

This research, which is a follow up on the previous piece, measures the impact national brand name has on prices compared to store brands and objective quality as evaluated by experts. The data shows that the average quality of store brands exceeds the average quality of national brands in 22 out of 78 product categories. Yet store brands typically do not charge price premiums, while national brands do (28.7 percent price premium on average). When national brands have higher quality, however, they increase the price premium from 28.7 percent to 50.4 percent on average. The analysis predicts that a national brand would command 37 percent price premium over a store brand that offers the same quality, a finding that highlights the handsome returns on building brand equity.

III. Customer Satisfaction

Customer satisfaction management is practiced by every successful company, but some companies go the extra mile, and offer service guarantees such as full or partial refund to consumers who are not satisfied with the product or service they have bought. Such guarantees may lead to unintended consequences if customers behave opportunistically, buying products they want to use for a limited period of time, and then return them for a full refund. Therefore it is important to derive conditions under which service guarantees can work efficiently, a problem addressed in the following two research papers.

Money back guarantees in retailing: matching products to consumer tastes

Product return policies are common in the USA, but full money-back guarantees are not offered on all products (for example, on computer equipment or opened software). This research helps determine conditions in which money-back guarantees work best to enhance profits and social welfare. The theoretical analysis shows that the profitability of a money-back guarantee for a particular product can be assessed by estimating salvage values of returned merchandise, the probabilities of mismatching the product to consumers, transaction costs of returning merchandise, and the value consumers receive from product trial. Preliminary evidence supporting our theory is presented.

Service Escape: Profiting From Customer Cancellations

When buying some services such as entertainment events, customers are told that the sale is final so that returns or cancellations are not allowed. This research shows that allowing consumers to cancel such prepaid purchases and offering partial refunds for cancellations can be profitable and efficient because it creates opportunities for multiple selling in a capacity-constrained service. The additional profits are realized because the service can collect cancellation fees from advance buyers who cancel, and then resell the freed slots. The better the opportunity that motivates a customer to cancel is, the more profitable is a refund-for-cancellations policy compared with a no-refund policy that “locks-in” customers. The research suggests that offering refunds for cancellations reduces the need to reserve capacity for high-paying customers and improves capacity utilization.

Should Captive Sardines Be Compensated? Serving Customers in a Confined Zone

Many services are delivered to a (large) number of customers simultaneously, within a confined zone (e.g., restaurants, resorts, trains, and aircrafts). Under unexpected high demand, customers experience discomfort from two major sources: (a) the “sardine effect” that arises when too many customers (“sardines”) compete for space and service resources; (b) the “captivity effect” that results from an exit cost incurred by customers who self-select to “escape” the (unpleasant) service. This paper investigates the optimal compensation and pricing policies under these two effects, showing that offering compensation to “sardines” can improve profit and social welfare. However, consumers do not benefit when compensated for the discomfort from crowding. The paper also provides insights by exploring how changes in the two effects impact price and profit.

 

Current Research Projects

For a Few Cents More: Why Supersize Unhealthy Food?

Healthcare experts believe that increases in portion sizes served by food vendors contribute to the obesity epidemic. This paper shows that food vendors can profit handsomely by using supersizing strategies under which regular portion sizes are priced sufficiently high to discourage price conscious consumers from selecting them, but the prices for enlarging food portions are set so low that these customers are tempted to order the larger portion sizes and overeat. Setting aside the impact of obesity on healthcare costs, we show that steering customers towards unhealthy supersized food portions through supersizing can destroy value from a social perspective, so this social value destruction trap adds another justification for pressuring food vendors to reduce supersizing for unhealthy food. As a public policy response, we consider how “moderating policies” may counter these effects through measures designed specifically to encourage eating in moderation by applying supersizing bans, taxes, and warnings.

Pricing and Food Waste

Economic models of consumption and firms’ pricing implicitly assume that products bought are entirely consumed, but consumers trash a substantial amount of products they buy. Specifically, food waste has attracted much attention recently, and retailers have been blamed for making the waste problem worse by using pricing strategies that help create it. This paper develops a model where pricing entice consumers to buy and trash food. The analysis explains why such pricing can be more profitable and economically efficient than simple unit pricing that does not create any waste.

Customer Bill of Rights under No-fault Service Failure

Service providers and their customers are sometimes victims of service failures caused by exogenous factors such as unexpected bad weather, power outages, or labor strikes. Such no-fault failures, which affect every customer on board, can cause painful experiences to consumers, in particular when they cannot leave the service freely. Service providers typically do not see themselves responsible for such no-fault failures, but customer complaints put regulators under pressure to pass a customer bill of rights (CBR) that allows captive customers to abort failed services with compensation. This paper shows that taking responsibility for no-fault service could be profitable because a voluntary CBR that encourages customers with high damage cost to leave under compensation can enhance profits and economic efficiency.

Negative Advertising under Destructive Competition

The use of Negative advertising (NA) when one brand disparages a rival brand is increasing; however this practice can be destructive to an industry if consumers are scared away from the market. In this paper, we show that firms may use NA despite the risk of substantial market destruction. The reason is that NA can effectively increase profits through brand differentiation and higher prices. We also derive conditions under which retaliation to NA attacks does or does not take place. The use of NA, however, hurts consumers and social welfare due to higher prices and the risk of market destruction.

 

Fee or Free ?

 

How Much To Add On For An Add-On

Sellers often provide complimentary “no extra charge” add-ons (e.g., free Internet connection) to consumers who buy their primary products (e.g., a hotel stay), but recently add-ons that used to be free are offered for a fee. The conventional wisdom is that unadvertised add-ons for high fees help competitors increase profits that are competed away by advertising low prices for the basic products. This theory cannot explain why complimentary add-ons are still offered by some sellers. We show that providing complimentary add-ons can be profitable for sellers with monopoly power under certain demand conditions. If these demand conditions are not met, it is optimal to charge a supplementary fee for the add-on. We also show how pricing policy can be designed to selectively target or deter different consumer segments from purchasing the add-on to boost sellers’ profits, providing a strategic role for selling add-ons at below-cost or exorbitantly high prices. Yet such behavior may have repercussions for economic welfare when it results in socially inefficient giveaways when consumers would be better served with a lower price on the basic product without the add-on or, with the other extreme, it results in excessively high prices for the add-on that restricts sales and leads to under-provision from a societal perspective. We conclude by providing managerial insights on the design and use of add-ons and suggesting possible areas for future research.

Selected Publications