AI at Wharton


Consumer preferences and firm technology choice

Authors: Yi Liu, Pinar Yildirim, Z. John Zhang


Advances in technology change the way consumers search and shop for products. Emerging is the trend of home-shopping devices such as Amazon’s Alexa and Google Home, which allow consumers to search or order products. We investigate how consumer brand and technology preferences may interact with the functionalities of technology-enabled shopping (TES) devices to determine the channel structure and market competition.

In specific, we break the functionalities of the TES devices into two: (1) the shopping support functionality (SSF), and (2) the ordering convenience functionality (OCF). Via a series of experiments, we document that stronger brand preferences are negatively correlated with the willingness to use a TES device that offers SSF. However, there is no association with brand preferences and desire to use a TES device when it offers OCF.

We build an analytical model integrating the findings from these experiments, and then derive the equilibrium channel and pricing strategies for two competing retailers. Our findings show that the functionality of TES devices results in vastly different distribution and pricing strategies in retail markets. In particular, consumers’ heterogeneous valuation of the SSF results in a monopolistic adoption of TES devices by the retailers in equilibrium, and generates Pareto improvements for both. In contrast, when the TES devices offer OCF, in equilibrium, retailers adopt TES channels competitively, resulting in a prisoners’ dilemma outcome. In the extensions, studying a third-party technology developer’s decision to invest in OCF and SSF technologies, we show that the contrast between the channel strategies under the OCF and the SSF also impact the incentives to develop TES. We show that in some cases, in an effort to mitigate downstream retail competition, the provider may prefer not to offer the best possible OCF technology to consumers. These findings shed light on the future adoption and the functionalities of shopping technologies offered by retailers.