Lecture Unit 9: Information Disclosure and Strategy (2/2) Flashcards
What is the potential negative impact of report cards according to the concept of “Multitasking: Teaching to the Test”?
- Report cards can do more harm than good.
- Agency creates the effect of multitasking, i.e., trying to do two or more things at once
- Improvements to earn a better report card may reduce quality in other unmeasured areas.
When is multitasking a potential problem in the context of report cards?
- Report cards are incomplete: they do not cover all relevant aspects of performance
- The agent has limited resources that must be allocated across tasks.
- A report card to boost some aspects of performance will necessarily affect other aspects of performance not covered by the report card.
What happens when you pay for X if X and Y are complements?
Pay for X and:
Get more of X and more of Y
What happens when you pay for X if X and Y are substitutes?
Pay for X and:
Get more of X and less of Y
What qualities do most report cards measure?
- Outcomes: most important measure for consumers (value of the product in use)
- Process: useful if outcomes are difficult to measure
- Inputs: useful if outcomes are difficult to measure, or if there are concerns about multitasking.
What are the considerations when measuring outcomes in report cards?
- Outcome data is not always available
- Noise may cause mean reversion: firms with high scores will have more than their share of good luck
- Customer feedback about outcomes may be unreliable.
What are some limitations of customer feedback on outcomes?
- Feedback is unverifiable
- Customer response rates are low, producing a poor sample size of a product’s total consumption.
- Motivation bias: Only customers that experience excellent or very low quality tend to provide feedback, leading to survey bias.
- Survivor bias: Those customers who did not like the product no longer use it and therefore are not surveyed
- Consumer demographics skew results as certain classes report consistently higher or lower ratings.
Limitations of customer feedback on outcomes: what is motivational bias?
- Motivation bias: Only customers that experience excellent or very low quality tend to provide feedback, leading to survey bias
Limitations of customer feedback on outcomes: what is Survivor bias?
- Survivor bias: Those customers who did not like the product no longer use it and therefore are not surveyed
When should process and input measures be used?
When outcome measurement faces challenges.
When does outcome measurement face challenges?
- If process and inputs are positively linked to favorable outcomes
- It is inexpensive to measure process and inputs compared to outcomes
- Process and inputs are not easily manipulated through multitasking
Why are raw outcome measures adjusted in risk adjustment?
- Raw outcome measures are adjusted for factors beyond the control of the seller;
- without risk adjustment, due to noise,
- high quality sellers may end up ranked at the bottom.
When should risk adjustment be utilized?
Risk adjustment should be utilized
- if the measured quality depends on the characteristics of the consumer.
Risk adjustment
What are examples requiring risk adjustment for airline on-time arrival measurements?
- May be due to typical weather in the areas served by the airline.
- Airline may fly point-to-point leading to higher on-time arrival averages.
Risk adjustment:
What are examples requiring risk adjustment for automobile repair statistics?
- High performance vehicles may require more maintenance due to their driving characteristics
- High performance cars should not be compared to luxury vehicles when measuring maintenance costs.
Why are composite scores useful in presenting report card results?
Composite scores make quality ranking easy for consumers to comprehend.
How are composite scores typically calculated?
Composite scores are often just the sum of average scores of several measured characteristics.
How can the components of composite scores be adjusted?
Components of composite scores can be weighted to achieve a better balance of information about quality.
Gaming report cards:
What must sellers of lower quality products accept in most markets?
- lower prices,
- lower quantity,
- or both.
Why do sellers have an incentive to manipulate report cards?
If the cost of manipulating report cards is less than improving product quality.
What can certifiers do to avoid the gaming of report cards?
Certifiers can take steps to avoid gaming of report cards.
What are some steps to avoid report card gaming? from sellers
- Scores should be reported in simple graphics
- Scores should be reported as composites.
- Multitasking can be avoided by reporting at the most aggregated level possible.
- Outcome measures should be complemented with process and input measures.
- Report card scores should be risk adjusted
Where do independent certifiers often receive a large portion of their profit?
What do e-business like amazion offer?
From firms they certify.
Amazon: offers certification
How do newspapers and magazines complement their primary business?
By offering reviews and certifications.
How do Amazon and other websites make money in addition to offering certifications?
By collecting and selling information about the habits of their users
On what do certifiers depend for their reputation?
Certifiers depend on their reputation of neutrality
What are consumers concerned about regarding certifiers?
Consumers may be concerned when business relationships create potential conflicts of interest.
What are two potential conflicts of interest in certification?
- Data may be collected from the firm (not independently)
- Firms may pay the certifiers directly for the report card.
Why is financial market certification bias a great concern and
how does the rating of a bond affect the rated firm?
- Because only three firms offer certifications of financial instruments like bonds.
- The rating of the bond determines the price and yield, and thus the profit to the rated firm.
Who pays for the bond certification and provides information for ratings?
- Issuers of bonds pay the certifiers directly and provide the information on which to base the ratings.
What do rating agencies do to gain favor and more business
Rating agencies engage in a “race to the bottom” in certifying bonds.
How does certification in horizontally differentiated markets differ from vertically differentiated markets?
- Certification in horizontally differentiated markets is different because consumers may disagree on product rankings
What is required to rank horizontal products?
Large amounts of data are required to rank horizontal products.
What are some sources of horizontal differentiation?
- Buyers may be differentiated by location
- Age or gender may separate buyers and their needs for product quality
- Religion, race, ethnic background, and sexual orientation can horizontally differentiate products
How do certifiers match consumers to firms in horizontally differentiated markets?
Certifiers can match consumers to the horizontally differentiated firms that best meet their idiosyncratic needs
What role can third-party certifiers fulfill in horizontally differentiated markets?
- Third-party certifiers can fulfill the same role as trusted friends by tailoring recommendations to the specific taste of individual consumers.
On what do experience goods depend in horizontally differentiated markets?
Experience goods depend on “like-minded” consumers rating the quality.
Why is it difficult to find a lot of similar consumers in horizontally differentiated markets?
Each consumer is relatively unique regarding their demographic profile.
How does the Internet impact the aggregation of consumer information?
The Internet allows large amounts of consumer information to be aggregated and enables all individuals to become certifiers.
What is a potential downside of using the Internet for certification in horizontally differentiated markets?
The Internet increases opportunities for biased certification.
How can certification help sellers in vertically differentiated markets?
- help sellers find buyers by including strong certification results in their marketing campaigns
What do sellers in horizontally differentiated markets require to reach out to buyers?
Sellers require knowledge of individual customer tastes
What are some methods sellers use to find buyers in horizontally differentiated markets?
- Demographic measurement (to find buyers that match the product characteristics)
- Advertising in specific TV programs or in certain sections of newspapers and magazines
- Utilizing the internet (buyers can use large search engine data pools).
How does the internet function in the context of evaluating experience goods
The internet becomes a virtual “town square” to help evaluate experience goods.
What are online satisfaction ratings subject to?
- Survey bias
- multitasking, and
- risk adjustment
How effective are today’s social networking sites at targeting customers? and
What do search engines like Google or Yahoo aggregate data on?
- Extremely effective.
- Products, quality, and sales.
What may happen as social networking sites develop more sophisticated ways to steer the business of their users?
Their profits may further increase to unprecedented heights.
