[Marketing] Xing Zhang - Menu-Induced Preference Cannibalization: A Field Study on Designing Probabilistic Price Promotions

Abstract<br /> <br /> An increasing number of companies adopt probabilistic price promotions, where consumer benefits depend on chance. Given that consumers vary in their risk preferences, should firms offer both fixed and probabilistic promotions in a menu to enhance self-selection, or stick with a single promotion type? This research examines&nbsp;how promotion menus affect purchase and post-purchase consumption. Across two field experiments and one preregistered online study, we find that offering a promotion menu reduces consumers&rsquo; purchase incidence compared to a single promotion scheme. However, conditional on purchase, consumers selecting from the menu demonstrate greater post-purchase consumption, indicating a stronger sunk cost effect. These findings indicate a preference cannibalization effect, where the perceived value of each option is reduced by the presence of alternative options. The results shed light on the design of price promotion strategies: while menus can reduce initial purchase incidence, they are less likely to diminish post-purchase engagement.

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[Marketing] Zhang Xing - Sunk Cost Effect, Self-control, and Contract Design

SKK GSB Professor Xing Zhang, with co-authors from China, Singapore, and the US, has published a paper titled &ldquo;Sunk Cost Effect, Self-control, and Contract Design,&rdquo; in the Journal of Marketing Research, a premier marketing journal<br /> <br /> <br /> <br /> Abstract&nbsp;<br /> <br /> This article examines the role of the sunk cost effect as a commitment device in mitigating the self-control problem and analyzes its implications for optimal contract design. Consumers may anticipate the effect ex ante and strategically use it to mitigate their self-control problems. Although the sunk cost effect may lead to a loss of consumption flexibility in the event of high consumption costs, it can serve as a commitment device to enforce self-control. A firm&#39;s optimal policy should balance the consumer&#39;s demand for flexibility in consumption with the demand for commitment. Under a simple fixed-fee contract, sunk costs have a nonmonotonic effect on profits for investment goods; that is, profits first decrease and then increase with the sunk cost effect. The firm can use a two-part tariff or a refundable fixed-fee contract to mitigate the sunk cost effect. This article also compares the implications of alternative psychological mechanisms underlying the sunk cost effect (regret-based vs. memory-cue-based) for contract design.

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