Lecture Unit 9: Information Disclosure and Strategy (2/2)

Question 1

What is the potential negative impact of report cards according to the concept of “Multitasking: Teaching to the Test”?

Answer 1

• 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.

Question 2

When is multitasking a potential problem in the context of report cards?

Answer 2

• 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.

Question 3

What happens when you pay for X if X and Y are complements?

Answer 3

Pay for X and:

Get more of X and more of Y

Question 4

What happens when you pay for X if X and Y are substitutes?

Answer 4

Pay for X and:

Get more of X and less of Y

Question 5

What qualities do most report cards measure?

Answer 5

• 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.

Question 6

What are the considerations when measuring outcomes in report cards?

Answer 6

• 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.

Question 7

What are some limitations of customer feedback on outcomes?

Answer 7

• 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.

Question 8

Limitations of customer feedback on outcomes: what is motivational bias?

Answer 8

• Motivation bias: Only customers that experience excellent or very low quality tend to provide feedback, leading to survey bias

Question 9

Limitations of customer feedback on outcomes: what is Survivor bias?

Answer 9

• Survivor bias: Those customers who did not like the product no longer use it and therefore are not surveyed

Question 10

When should process and input measures be used?

Answer 10

When outcome measurement faces challenges.

Question 11

When does outcome measurement face challenges?

Answer 11

• 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

Question 12

Why are raw outcome measures adjusted in risk adjustment?

Answer 12

• 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.

Question 13

When should risk adjustment be utilized?

Answer 13

Risk adjustment should be utilized

• if the measured quality depends on the characteristics of the consumer.

Question 14

Risk adjustment
What are examples requiring risk adjustment for airline on-time arrival measurements?

Answer 14

• 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.

Question 15

Risk adjustment:

What are examples requiring risk adjustment for automobile repair statistics?

Answer 15

• 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.

Question 16

Why are composite scores useful in presenting report card results?

Answer 16

Composite scores make quality ranking easy for consumers to comprehend.

Question 17

How are composite scores typically calculated?

Answer 17

Composite scores are often just the sum of average scores of several measured characteristics.

Question 18

How can the components of composite scores be adjusted?

Answer 18

Components of composite scores can be weighted to achieve a better balance of information about quality.

Question 19

Gaming report cards:
What must sellers of lower quality products accept in most markets?

Answer 19

• lower prices,
• lower quantity,
• or both.

Question 20

Why do sellers have an incentive to manipulate report cards?

Answer 20

If the cost of manipulating report cards is less than improving product quality.

Question 21

What can certifiers do to avoid the gaming of report cards?

Answer 21

Certifiers can take steps to avoid gaming of report cards.

Question 22

What are some steps to avoid report card gaming? from sellers

Answer 22

• 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

Question 23

Where do independent certifiers often receive a large portion of their profit?

What do e-business like amazion offer?

Answer 23

From firms they certify.

Amazon: offers certification

Question 24

How do newspapers and magazines complement their primary business?

Answer 24

By offering reviews and certifications.

Question 25

How do Amazon and other websites make money in addition to offering certifications?

Answer 25

By collecting and selling information about the habits of their users

Question 26

On what do certifiers depend for their reputation?

Answer 26

Certifiers depend on their reputation of neutrality

Question 27

What are consumers concerned about regarding certifiers?

Answer 27

Consumers may be concerned when business relationships create potential conflicts of interest.

Question 28

What are two potential conflicts of interest in certification?

Answer 28

• Data may be collected from the firm (not independently)
• Firms may pay the certifiers directly for the report card.

Question 29

Why is financial market certification bias a great concern and

how does the rating of a bond affect the rated firm?

Answer 29

• 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.

Question 30

Who pays for the bond certification and provides information for ratings?

Answer 30

• Issuers of bonds pay the certifiers directly and provide the information on which to base the ratings.

Question 31

What do rating agencies do to gain favor and more business

Answer 31

Rating agencies engage in a “race to the bottom” in certifying bonds.

Question 32

How does certification in horizontally differentiated markets differ from vertically differentiated markets?

Answer 32

• Certification in horizontally differentiated markets is different because consumers may disagree on product rankings

Question 33

What is required to rank horizontal products?

Answer 33

Large amounts of data are required to rank horizontal products.

Question 34

What are some sources of horizontal differentiation?

Answer 34

• 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

Question 35

How do certifiers match consumers to firms in horizontally differentiated markets?

Answer 35

Certifiers can match consumers to the horizontally differentiated firms that best meet their idiosyncratic needs

Question 36

What role can third-party certifiers fulfill in horizontally differentiated markets?

Answer 36

• Third-party certifiers can fulfill the same role as trusted friends by tailoring recommendations to the specific taste of individual consumers.

Question 37

On what do experience goods depend in horizontally differentiated markets?

Answer 37

Experience goods depend on “like-minded” consumers rating the quality.

Question 38

Why is it difficult to find a lot of similar consumers in horizontally differentiated markets?

Answer 38

Each consumer is relatively unique regarding their demographic profile.

Question 39

How does the Internet impact the aggregation of consumer information?

Answer 39

The Internet allows large amounts of consumer information to be aggregated and enables all individuals to become certifiers.

Question 40

What is a potential downside of using the Internet for certification in horizontally differentiated markets?

Answer 40

The Internet increases opportunities for biased certification.

Question 41

How can certification help sellers in vertically differentiated markets?

Answer 41

• help sellers find buyers by including strong certification results in their marketing campaigns

Question 42

What do sellers in horizontally differentiated markets require to reach out to buyers?

Answer 42

Sellers require knowledge of individual customer tastes

Question 43

What are some methods sellers use to find buyers in horizontally differentiated markets?

Answer 43

• 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).

Question 44

How does the internet function in the context of evaluating experience goods

Answer 44

The internet becomes a virtual “town square” to help evaluate experience goods.

Question 45

What are online satisfaction ratings subject to?

Answer 45

• Survey bias
• multitasking, and
• risk adjustment

Question 46

How effective are today’s social networking sites at targeting customers? and

What do search engines like Google or Yahoo aggregate data on?

Answer 46

• Extremely effective.
• Products, quality, and sales.

Question 47

What may happen as social networking sites develop more sophisticated ways to steer the business of their users?

Answer 47

Their profits may further increase to unprecedented heights.