Adopting Cost Transparency as a Marketing Strategy: Analytical and Experimental Exploration

46 Pages Posted: 11 Oct 2018

See all articles by Wei Shi Lim

Wei Shi Lim

National University of Singapore

Vincent Mak

University of Cambridge - Cambridge Judge Business School

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area

Raghabendra P. KC

University of Cambridge - Cambridge Judge Business School; Rollins College

Date Written: September 21, 2018

Abstract

Should sellers disclose their cost information to potential buyers? If yes, under what conditions should firms adopt this cost transparent strategy? We examine these questions by using an analytical approach followed by an experimental analysis. To begin, we develop a monopolistic model to show that the transparent strategy is optimum if and only if products are of low perceived quality and relatively high unit cost. This result implies that luxury goods firms (with high perceived quality and relatively low unit cost) should not disclose their cost information. Next, our analytical result reveals that the quality differentiation between firms in a duopoly is a key driver for predicting whether different firms should adopt the transparent strategy or not. Specifically, no firm should adopt the transparent strategy when the quality differentiation is high because different firms can set different selling price to segment the market. However, when the quality differentiation becomes less prominent, competitive pricing alone is not sufficient and the transparent strategy becomes the additional lever for firms to segment the market. Using a laboratory experiment, we validate our analytical results to show that as quality differentiation decreases, the adoption of the transparent strategy increases but the selling price decreases.

Suggested Citation

Lim, Wei Shi and Mak, Vincent and Tang, Christopher S. and KC, Raghabendra P., Adopting Cost Transparency as a Marketing Strategy: Analytical and Experimental Exploration (September 21, 2018). Available at SSRN: https://ssrn.com/abstract=3252823 or http://dx.doi.org/10.2139/ssrn.3252823

Wei Shi Lim (Contact Author)

National University of Singapore ( email )

1 Business Link
Singapore, 117592
Singapore

Vincent Mak

University of Cambridge - Cambridge Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0)1223 764295 (Phone)
+44 (0)1223 339701 (Fax)

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/x980.xml

Raghabendra P. KC

University of Cambridge - Cambridge Judge Business School ( email )

Trumpington Street
Cambridge, Cambridgeshire CB2 1AG
United Kingdom

Rollins College ( email )

1000 Holt Avenue
Winter Park, FL 32789
United States

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