Tony Haitao Cui and Paola Mallucci (2016) “Fairness Ideals in Distribution Channels”. Journal of Marketing Research. 53(6), 969-987. Equal authorship.
selected press coverage: "Why Fair and Unfair Can Coexist: Looking at Prices in Channel Relationships" Forward Thinking Blog
The authors analytically and experimentally evaluate how firms make decisions in a two-stage dyadic channel, in which firms decide on investments in the first stage and then on prices in the second stage. They find that firms’ behavior differs significantly from the predictions of the standard economic model and is consistent with the existence of fairness concerns. Using a quantal response equilibrium model, in which both manufacturer and retailer make noisy best responses, the authors show that fairness significantly affects channel pricing decisions. In addition, they investigate what affects the perceptions of fairness. More specifically, they analyze whether the notion of fairness is influenced by social norms of strict equality, by endogenous investments and contributions that are affected by players’ decisions, or by the exogenous game structure. To do so, the authors compare four principles of distributive fairness: strict egalitarianism; liberal egalitarianism; libertarianism; and a sequence-aligned ideal, which is studied for the first time in the literature. Surprisingly, the exogenous game structure reflected by the new ideal, whereby the sequence of moving determines the equitable payoff for players, significantly outperforms other fairness ideals, suggesting that equity in distribution channels can arise even in contests in which channel members have fairly different payoffs.
Paola Mallucci, Diana Wu and Tony Cui (forthcoming) “Impact of Social Motives on Bilateral Negotiations: How Power Changes Perceptions of Fairness”. Journal of Economic Behavior and Organizations
Power, a fundamental characteristic of social interactions, characterizes one’s ability to influence others. Fairness, inherently a type of social preference, impacts distributive decision-making. How does power shape the perceptions of fairness in economic interactions? While previous research finds that power holders tend to take more, it remains unclear whether they are driven by selfish motives to exploit weaker counterparts or act upon the belief that powerful individuals deserve more. With an innovative modified ultimatum game, we analytically and experimentally study how bargaining power interplays with fairness consideration to affect bilateral negotiations. To separate strategic concerns from social motives, we concentrate on behaviors by the responder, whose fairness preferences are elicited in response to shifts in power. We find strong evidence that changes in power can modify what is perceived as a fair outcome. However, such an effect does not arise intrinsically. Instead, it is driven by adaptive behaviors, and more specifically, the experience of interacting with a player who has incentives to respond strategically to power changes. Furthermore, we identify that common knowledge about the relative power of players involved in a relationship is necessary for power to influence distributive behaviors.
“Pricing Cause Related Marketing Products,” with George John and Tony Haitao Cui
Under review at Marketing Science
The broad takeaway from the literature on cause-related marketing products, where firms donate to charities when consumers make a purchase, is that ``warm glow" can increase demand. However, recent field results show that embedding donations increases demand only if the price of the product is high enough. Otherwise, demand can diminish in the donation amount, implicating mechanisms beyond warm glow, specifically reputation for generosity. However, there is no extant work informing firms' cause-marketing choices given these non-monotonic demand effects. We seek to close this gap.
Drawing from identity theory models, we write a consumer model that incorporates reputation concerns in addition to warm glow. We solve analytically for optimal product prices and donation amounts under a differentiated duopoly as well as a monopoly setting. Our results are surprising. First, equilibrium profits can increase despite reputation concerns reducing consumers' utility. Second, warm glow and reputation concerns play complementary roles: warm glow drives the firm's choice to participate in cause marketing (i.e., embed a positive donation amount), while reputation concerns drive the profitability of the campaign. Third, firms may find it optimal to endogenously design cause marketing campaigns that induce negative reputation effects. Finally, surprisingly, it is in competition, not monopoly, that producers reap the most benefits from reputation concerns.
“Can Haggling Facilitate Price Collusion?,” with Tony Haitao Cui, and Z. John Zhang
Haggling is a common practice in a number of industries. Firms in auto and furniture industries, among others, commonly post their prices, but also allow consumers to haggle on final purchase prices. Using Nash bargaining model, we investigate how list prices affect price competition between firms when firms are competing for both hagglers and non-hagglers. Drawing from the literature on reference prices, we assume consumers use the posted list prices as reference prices and anchor on them when forming expectations about the price of the outside option. Our analysis shows that, if the number of such boundedly rational hagglers is sufficiently large in the market, haggling can lead competing firms to collude tacitly. Therefore, we show that haggling can be highly profitable for firms because it facilitates not only price discrimination as recognized previously in the literature, but also price collusion. This helps explain why dealers allow haggling and routinely post exaggerated list prices.
"Risk and Fairness in Channel Relationships: Evidence of Behavioral Inconsistencies," with Emilio Cuilty and Jordan Tong
In channel negotiation between suppliers and retailers there is often significant uncertainty that is unevenly distributed between the two firms. While there is ample evidence in the literature that both risk preferences and fairness would matter in such contexts, there is a lack of evidence on how subjects' beliefs and preferences for risk and fairness interact, leaving open the question of how individuals will attempt to fairly compensate risk that they or their channel partner face. To address the question, we model a wholesale pricing decision between a supplier and a retailer who may not be risk neutral and may care for fairness. We then compare the prediction of the theoretical model with data from two incentive-compatible experiments. We find that suppliers squeeze retailers more when retailers face risk, even though (1) suppliers are not more generous when they face risk themselves, and (2) retailers do not accept worse offers under risk. We show that this behavior is incompatible with preferences for risk and/or fairness in which subjects beliefs about the other players preferences are consistent with their actual preferences. Using a structural approach, we then estimate the behavioral parameters and find evidence that suppliers underestimate the risk aversion of retailers leading to significant deadweight losses in situations where the retailer (vs. the supplier) carries the risk.
"Corporate Social Responsibility and Advertisement under Asymmetric Product Quality Information" with Yue Li
We investigate the informational role of corporate social responsibility and its interaction with informative advertising when quality information is asymmetric. We find that CSR can lead to a separating equilibrium as long as the number of informed customers in the market is either high or low. Surprisingly, advertisement will neither crowd out CSR nor inform all consumers. Furthermore, the high quality firm will treat advertisement and CSR like substitutes, if the marginal returns to advertisement are non-decreasing, while it might treat them like complements, when marginal returns to advertisement are decreasing.
To separate the high quality firm may have to distort its CSR investment and/or price away from first best. Interestingly, if the quality difference is high and the fraction of informed consumers is low, the high quality firm can distort its CSR investment downwards and make a lower CSR investment than the low quality firm. This downward CSR distortion "burns demand" and makes imitation by the low quality firm less appealing. This mechanism is novel and distinct from both money burning and counter-signaling. We show results are robust to assumptions about the heterogeneity in consumers preferences, firms' costs and CSR investment quality.
"Limited Capacity, Hype and Resale Markets" with Yue Li, Sriniketh Vijayaraghavan and Paul Hoban
"Gambling and Donations" with Darcy Fudge
"Uncertain Roles and the Holdup Problem" with Diana Wu
“Territory Allocation Rules and Salesforce Effort” with Madhu Viswanathan
“Bargaining over Risk” with Lindon Wei and Enno Siemsen
Tony Haitao Cui, Paola Mallucci, Jagmohan Raju and Z. John Zhang (2018) "Social Preferences and Distribution Channels" in Handbook of Research on Distribution Channels edited by Rajiv Dant, Charles A. Ingene, and James Brown, Edward Elgar Publishing
We examine the effect on channel decisions and profitability of a class of preferences known as social preferences. We concentrate on fairness and provide results for analytical models of channel relationships in which the retailer cares for fairness. We show that fairness can coordinate the channel when the retailer is sufficiently adverse to inequity. Further, we investigate how fairness affects the most popular channel coordinating mechanisms (i.e. two part tariffs and quantity discounts) and show that introducing these contracts in the presence of fairness leads to very different results in terms of both channel efficiency and profit distribution among channel members. Next, we explore how different concepts of fairness impact the efficiency of the channel and extend the model to allow for fairness concerns on the manufacturer to confirm the channel coordinating ability of fairness. We conclude with empirical predictions to be tested on field data in future research.