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The strength, impact and value of a brand are embodied, fairly concisely, in the concept of ‘brand equity’. However, there are different views on how to express and measure brand equity, whether from a consumer (customer) perspective or a firm perspective. Metrics based on a consumer viewpoint (measured in surveys) raise particular concern as to what actual effects they have in the marketplace. Datta, Ailawadi and van Heerde (2017) have answered to the challenge and investigated how well Consumer-Based metrics of Brand Equity (CBBE) align with Sales-Based estimates of Brand Equity (SBBE). The CBBE metrics were adopted from the model of Brand Asset Valuator (Y&R) whereas SBBE estimates were derived from modelling market data of actual purchases. They also examined the association of CBBE with behavioural response to marketing mix actions [1].

In essence, brand equity expresses an incremental value of a product (or service) that can be attributed to its brand name above and beyond physical (or functional) attributes. Alternately,  brand equity is conceived as the added value of a branded product compared with an identical version of that product if it were unbranded. David Aaker defined four main groups of assets linked to a brand that add to its value: awareness, perceived quality, loyalty, and associations beyond perceived quality. On the grounds of this conceptualization, Aaker subsequently proposed the Brand Equity Ten measures, grouped into five categories: brand loyalty, awareness, perceived quality / leadership, association / differentiation, and market behaviour. Kevin Keller broadened the scope of brand equity wherein greater and more positive knowledge of customers (consumers) about a brand would lead them to respond more favourably to marketing activities of the brand (e.g., pricing, advertising).

The impact of a brand may occur at three levels: customer market, product market and financial market. In accordance, academics have followed three distinct perspectives for measuring brand equity: (a) customer-based — an attraction of consumers to the “non-objective” part of the product offering (e.g., ‘mindset’  as in beliefs and attitudes, brand-specific ‘intercept’ in a choice model); (b) company-based — additional value accrued to the firm from a product because of a brand name versus an equivalent product but non-branded (e.g., discounted cash flow); financial-based — brand’s worth is the price it brings or could bring in the financial market (e.g., materialised via mergers and acquisitions, stock prices)[2]. This classification is not universal:  for example, discounted cash flows are sometimes described as ‘financial’; estimates of brand value derived from a choice-based conjoint model constitute a more implicit reflection of the consumers’ viewpoint. Furthermore, models based on stated-choice (conjoint) or purchase (market share) data may vary greatly in the effects they include whether in interaction with each competing brand or independent from the brand ‘main effect’ (e.g., product attributes, price, other marketing mix variables).

A class of attitudinal (‘mindset’) models of brand equity may encompass a number of aspects and layers: awareness –> perceptions and attitudes about product attributes and functional benefits (+ overall perceived quality), ‘soft’ image associations (e.g., emotions, personality, social benefits) –> attachment or affinity –> loyalty (commitment). Two noteworthy academic studies have built upon the conceptualizations of Aaker and Keller in constructing and testing consumer-based measures:

  • Yoo and Donthu (2001) constructed a three-dimension model of brand equity comprising brand loyalty, brand awareness / associations (combined), and perceived quality (strength of associations was adopted from Keller’s descriptors of brand image). The multidimensional scale (MBE) was tested and validated across multiple product categories and cultural communities [3].
  • Netemeyer and colleagues (2004) demonstrated across products and brands that perceived quality, perceived value (for the cost), and uniqueness of a given brand potentially contribute to willingness to pay a price premium for the brand which in turn acts as a direct antecedent of brand purchase behaviour [4]. Price premium, an aspect of brand loyalty, is a common metric used for assessing brand equity.

Datta, Ailawadi and van Heerde distinguish between two measurement approaches: the consumer-based brand equity (CBBE) approach measures what consumers think and feel about the brand, while the sales-based brand equity (SBBE) approach is based on choice or share of the brand in the marketplace.

The CBBE approach in their research is applied through data on metrics from the Brand Asset Valuator model developed originally by Young and Roubicam (Y&R) advertising agency (the brand research activity is now defined as a separate entity, BAV Group; both Y&R and BAV Group are part of WPP media group). The BAV model includes four dimensions: Relevance to the consumers (e.g., fits in their lifestyles); Esteem of the brand (i.e., how much consumers like the brand and hold it in high regard); Knowledge of the brand (i.e., consumers are aware of and understand what the brand stands for); and  Differentiation from the competition (e.g., uniqueness of the brand)[5].

The SBBE approach is operationalised through modelling of purchase data (weekly scanner data from IRI). The researchers derive estimates of brand value in a market share attraction model (with over 400 brands from 25 categories, though just 290 brands for which BAV data could be obtained were included in subsequent CBBE-SBBE analyses) over a span of ten years (2002-2011). Notably, brand-specific intercepts were estimated for each year; an annual level is sufficient and realistic to account for the pace of change in brand equity over time. The model allowed for variation between brands in the sensitivity to their marketing mix actions (regular prices, promotional prices, advertising spending, distribution {on-shelf availability} and promotional display in stores) — these measures are not taken as part of SBBE values but indicate nonetheless expected manifestation of higher brand equity (impact); after being converted into elasticities, they play a key role in examining the relation of CBBE to behavioural outcomes in the marketplace.


  • Datta et al. seem to include in a SBBE approach estimates derived from (a) actual brand choices and sales data as well as (b) self-reported choices in conjoint studies and surveys. But subjective responses and behavioural responses are not quite equivalent bases. The authors may have aimed reasonably to distinguish ‘choice-based’ measures of brand equity from ‘attitudinal’ measures, but it still does not justify to mix between brands and products consumers say they would choose and those they actually choose to purchase. Conjoint-based estimates are more closely consumer-based.
  • Take for instance a research by Ferjani, Jedidi and Jagpal (2009) who offer a different angle on levels of valuation of brand equity. They derived brand values through a choice-based conjoint model (Hierarchical Bayes estimation at the individual level), regarded as consumer-level valuation. Vis-à-vis the researchers constructed a measure of brand equity from a firm perspective based on expected profits (rather than discounted cash flows), presented as firm-level valuation. Nonetheless, in order to estimate sales volume they ‘imported’ predicted market shares from the conjoint study, thus linking the two levels [6].

 

Not all dimensions of BAV (CBBE) are the same in relation to SBBE: Three of the dimensions of BAV — relevance, esteem, and knowledge — are positively correlated with SBBE (0.35, 0.39, & 0.53), while differentiation is negatively although weakly correlated with SBBE (-0.14). The researchers reasoned in advance that differentiation could have a more nuanced and versatile market effect (a hypothesis confirmed) because differentiation could mean the brand is attractive to only some segments and not others, or that uniqueness may appeal to only some of the consumers (e.g., more open to novelty and distinction).

Datta et al. show that correlations of relevance (0.55) and esteem (0.56) with market shares of the brands are even higher, and the correlation of differentiation with market shares is less negative (-0.08), than their correlations with SBBE (correlations of knowledge are about the same). The SBBE values capture a portion of brand attraction to consumers. Market shares on the other hand factor in additional marketing efforts that dimensions of BAV seem to account for.

Some interesting brand cases can be detected in a mapping of brands in two categories (for 2011): beer and laundry detergents. For example, among beers, Corona is positioned on SBBE much higher than expected given its overall BAV score, which places the brand among those better valued on a consumer basis (only one brand is considerably higher — Budweiser). However, with respect to market share the position of Corona is much less flattering and quite as expected relative to its consumer-based BAV score, even a little lower. This could suggest that too much power is credited to the name and other symbols of Corona, while the backing from marketing efforts to support and sustain it is lacking (i.e., the market share of Corona is vulnerable).  As another example, in the category of laundry detergents, Tide (P&G) is truly at the top on both BAV (CBBE) and market share. Yet, the position of Tide on SBBE relative to BAV score is not exceptional or impressive, being lower than predicted for its consumer-based brand equity. The success of the brand and consumer appreciation for it may not be adequately attributed specifically to the brand in the marketplace but apparently more to other marketing activities in its name (i.e., marketing efforts do not help to enhance the brand).

The degree of correlation between CBBE and SBBE may be moderated by characteristics of product category. Following the salient difference cited above between dimensions of BAV in relation to SBBE, the researchers identify two separate factors of BAV: relevant stature (relevance + esteem + knowledge) and (energized) differentiation [7].

In more concentrated product categories (i.e., the four largest brands by market share hold a greater total share of the category), the positive effect of brand stature on SBBE is reduced. Relevance, esteem and knowledge may serve as particularly useful cues by consumers in fragmented markets, where it is more necessary for them to sort and screen among many smaller brands, thus to simplify the choice decision process. When concentration is greater, reliance on such cues is less required. On the other hand, when the category is more concentrated, controlled by a few big brands, it should be easier for consumers to compare between them and find aspects on which each brand is unique or superior. Indeed, Datta and colleagues find that in categories with increased concentration, differentiation has a stronger positive effect on SBBE.

For products characterised by greater social or symbolic value (e.g., more visible to others when used, shared with others), higher brand stature contributes to higher SBBE in the market. The researchers could not confirm, however, that differentiation manifests in higher SBBE for products of higher social value. The advantage of using brands better recognized and respected by others appears to be primarily associated with facets such as relevance and esteem of the brand.

Brand experience with hedonic products (e.g., leisure, entertainment, treats) builds on enjoyment, pleasure and additional positive emotions the brand succeeds in evoking in consumers. Sensory attributes of the product (look, sound, scent, taste, touch) and holistic image are vital in creating a desirable experience. Contrary to expectation of Datta and colleagues, however, it was not found that stature translates to higher SBBE for brands of hedonic products (even to the contrary). This is not so good news for experiential brands in these categories that rely on enhancing relevance and appeal to consumers, who also understand the brands and connect with them, to create sales-based brand equity in the marketplace. The authors suggest in their article that being personally enjoyable (inward-looking) may overshadow the importance of broad appeal and status (outward-looking) for SBBE. Nevertheless, fortunately enough, differentiation does matter for highlighting benefits of the experience of hedonic products, contributing to a raised sales-based brand equity (SBBE).

Datta, Ailawadi and van Heerde proceeded to examine how strongly CBBE corresponds with behavioural responses in the marketplace (elasticities) as manifestation of the anticipated impact of brand equity.

Results indicated that when relevant stature of a brand is higher consumers respond favourably even more strongly to price discounts or deals  (i.e.,  elasticity of response to promotional prices is further more negative or inverse). Yet, the expectation that consumers would be less sensitive (adverse) to increased regular prices by brands of greater stature was not substantiated (i.e., expected positive effect: less negative elasticity). (Differentiation was not found to have a positive effect on response to regular prices either, and could be counter-conducive for price promotions.)

An important implication of brand equity should be that consumers are more willing to pay higher regular prices for a brand of higher stature (i.e., a larger price premium) relative to competing brands, and more forgiving when such a brand sees it necessary to update and raise its regular price. The brand may benefit from being more personally relevant to the consumer, better understood and more highly appreciated. A brand more clearly differentiated from competitors with respect to its advantages could also benefit from a protected status. All these properties are presumed to enhance attachment to a brand, and subsequently lead to greater loyalty, making consumers more ready to stick with the brand even as it becomes more expensive. This research disproves such expectations. Better responsiveness to price promotions can help to increase sales and revenue, but it testifies to the heightened level of competition in many categories (e.g., FMCG or packaged goods) and propensity of consumers to be more opportunistic rather than to the strength of the brands. This result, actually a warning signal, cannot be brushed away easily.

  • Towards the end of the article, the researchers suggest as explanation that they ignored possible differences in response to increases and decreases in regular prices (i.e., asymmetric elasticity). Even so, increases in regular prices by stronger brands are more likely to happen than price decreases, and the latter already are more realistically accounted for in response to promotional prices.

Relevant stature is positively related to responsiveness to feature or promotional display (i.e., consumers are more inclined to purchase from a higher stature brand when in an advantaged display). Consumers also are more strongly receptive to larger volume of advertising by brands of higher stature and better differentiation in their eyes (this analysis could not refer to actual advertising messages and hence perhaps the weaker positive effects). Another interesting finding indicates that sensitivity to degree of distribution (on-shelf availability) is inversely associated with stature — the higher the brand stature from consumer viewpoint, larger distribution is less attractive to the consumers. As the researchers suggest, consumers are more willing to look harder and farther (e.g., in other stores) for those brands regarded more important for them to have. So here is a positive evidence for the impact of stronger brands or higher brand equity.

The research gives rise to some methodological questions on measurement of brand equity that remain open for further deliberation:

  1. Should the measure of brand equity in choice models rely only on a brand-specific intercept (expressing intrinsic assets or value of the brand) or should it include also a reflection of the impact of brand equity as in response to marketing mix activities?
  2. Are attitudinal measures of brand equity (CBBE) too gross and not sensitive enough to capture the incremental value added by the brand or is the measure of brand equity based only on a brand-intercept term in a model of actual purchase data too specific and narrow?  (unless it accounts for some of the impact of brand equity)
  3. How should measures of brand equity based on stated-choice (conjoint) data and actual purchase data be classified with respect to a consumer perspective? (both pertain really to consumers: either their cognition or overt behaviour).

Datta, Ailawadi and van Heerde throw light in their extensive research on the relation of consumer-based equity (CBBE) to behavioural outcomes, manifested in brand equity based on actual purchases (SBBE) and in effects on response to marketing mix actions as an impact of brand equity. Attention should be awarded to positive implications of this research for practice but nonetheless also to the warning alerts it may signal.

Ron Ventura, Ph.D. (Marketing)

Notes:

[1] How Well Does Consumer-Based Brand Equity Align with Sales-Based Brand Equity and Marketing-Mix Response?; Hannes Datta, Kusum L. Ailawadi, & Harald J. van Heerde, 2017; Journal of Marketing, 81 (May), pp. 1-20. (DOI: 10.1509/jm.15.0340)

[2] Brands and Branding: Research Findings and Future Priorities; Kevin L. Keller and Donald R. Lehmann, 2006; Marketing Science, 25 (6), pp. 740-759. (DOI: 10.1287/mksc.1050.0153)

[3] Developing and Validating a Multidimensional Consumer-Based Brand Equity Scale; Boonghee Yoo and Naveen Donthu, 2001; Journal of Business Research, 52, pp. 1-14.

[4]  Developing and Validating Measures of Facets of Customer-Based Brand Equity; Richard G. Netemeyer, Balaji Krishnan, Chris Pullig, Guangping Wang,  Mahmet Yageci, Dwane Dean, Joe Ricks, & Ferdinand Wirth, 2004; Journal of Business Research, 57, pp. 209-224.

[5] The authors name this dimension ‘energised differentiation’ in reference to an article in which researchers Mizik and Jacobson identified a fifth pillar of energy, and suggest that differentiation and energy have since been merged. However, this change is not mentioned or revealed on the website of BAV Group.

[6] A Conjoint Approach for Consumer- and Firm-Level Brand Valuation; Madiha Ferjani, Kamel Jedidi, & Sharan Jagpal, 2009; Journal of Marketing Research, 46 (December), pp. 846-862.

[7] These two factors (principal components) extracted by Datta et al. are different from two higher dimensions defined by BAV Group (stature = esteem and knowledge, strength = relevance and differentiation). However, the distinction made by the researchers as corroborated by their data is more meaningful  and relevant in the context of this study.

 

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Fifteen years have passed since a Nobel Prize in economics was awarded to Daniel Kahneman to this time (Fall 2017) when another leading researcher in behavioural economics, Richard Thaler, wins this honourable prize. Thaler and Kahneman are no strangers — they have collaborated in research in this field from its early days in the late 1970s. Moreover, Kahneman together with the late Amos Tversky helped Thaler in his first steps in this field, or more generally in meeting economics with psychology. Key elements of Thaler’s theory of Mental Accounting are based on the value function in Kanheman and Tversky’s Prospect theory.

In recent years Thaler is better known for the approach he devised of choice architecture and the tools of nudging, as co-author of the book “Nudge: Improving Decisions About Health, Wealth and Happiness” with Cass Sunstein (2008-9). However, at the core of the contribution of Thaler is the theory of mental accounting where he helped to lay the foundations of behavioural economics. The applied tools of nudging are not appropriately appreciated without understanding the concepts of mental accounting and other phenomena he studied with colleagues which describe deviations in judgement and behaviour from the rational economic model.

Thaler, originally an economist, was unhappy with predictions of consumer choice arising from microeconomics — the principles of economic theory were not contested as a normative theory (e.g., regarding optimization) but claims by economists that the theory is able to describe actual consumer behaviour and predict it were put into question. Furthermore, Thaler and others early on argued that deviations from rational judgement and choice behaviour are predictable.  In his ‘maverick’ paper “Toward a Positive Theory of Consumer Choice” from 1980, Thaler described and explained deviations and anomalies in consumer choice that stand in disagreement with the economic theory. He referred to concepts such as framing of gains and losses, the endowment effect, sunk costs, search for information on prices, regret, and self-control (1).

The theory of mental accounting developed by Thaler thereafter is already an integrated framework that describes how consumers perform value judgements and make choice decisions of products and services to purchase while recognising psychological effects in making economic decisions (2).  The theory is built around three prominent concepts (described here only briefly):

Dividing a budget into categories of expenses: Consumers metaphorically (but sometimes physically) allocate the money of their budget into buckets or envelopes according to type or purpose of expenses. It means that they do not transfer money freely between categories (e.g., food, entertainment). This concept contradicts the economic principle of fungibility, thus suggesting that one dollar is not valued the same in every category. A further implication is that each category has a sub-budget allotted to it, and if expenses in the category during a period surpass its limit, a consumer will prefer to give up on the next purchase and refrain from adding money from another category. Hence, for instance,  Dan and Edna will not go out for dinner at a trendy restaurant if that requires taking money planned for buying shoes for their child. However, managing the budget according to the total limit of income in each month is more often unsatisfactory, and some purchases can still be made on credit without hurting other purchases in the same month. On the other hand, it can readily be seen how consumers get into trouble when they try to spread too many expenses across future periods with their credit cards, and lose track of the category limits for their different expenses.

Segregating gains and integrating losses: In the model of a value function by Kahneman and Tversky, value is defined upon gains and losses as one departs from a reference point (a “status quo” state). Thaler explicated in turn how properties of the gain-loss value function would be implemented in practical evaluations of outcomes. The two general “rules”, as demonstrated most clearly in “pure” cases, say: (a) if there are two or more gains, consumers prefer to segregate them (e.g., if Chris makes gains on two different shares on a given day, he will prefer to see them separately); (b) if there are two or more losses, consumers prefer to integrate them (e.g., Sarah is informed of a price for an inter-city train trip but then told there is a surcharge for travelling in the morning — she will prefer to consider the total cost for her requested journey). Thaler additionally proposed what consumers would prefer doing in more complicated cases of “mixed” gains and losses, whether to segregate between the gain and loss (e.g., if the loss is much greater than the gain) or integrate them (e.g., if the gain is larger than the loss so that one remains with a net gain).

Adding-up acquisition value with transaction value to evaluate product offers: A product or service offer generally exhibits in it benefits and costs to the consumer (e.g., the example of a train ticket above overlooked the benefit of the travel to Sarah). But value may arise from the offering or deal itself beyond the product per se. Thaler recognised that consumers may look at two sources of value, and composing or adding them together would yield the overall worth of a product purchase offer: (1) Acquisition utility is the value of a difference between the [monetary] value equivalent of a product to the consumer and its actual price; (2) Transaction utility is the value of a difference between the actual price and a reference price. In the calculus of value, hides the play of gains and losses. This value concept was quite quickly adopted by consumer and marketing researchers in academia and implemented in means-end models that depict chains of value underlying the purchase decision process of consumers (mostly in the mid-1980s to mid-1990s). Thaler’s approach to ‘analysing’ value is getting more widely acknowledged and applied also in practice, as expressions of value as such in consumer response to offerings can be found in so many domains of marketing and retailing.

A reference price may receive different representations, for instance: the price last paid; price recalled from a previous period; average or median price in the same product class; a ‘normal’ or list price; a ‘fair’ or ‘just’ price (which is not so easy to specify). The transaction value may vary quite a lot depending on the form of reference price a consumer uses, ceteris paribus, and hence affect how the transaction value is represented (i.e., as a gain or a loss and its magnitude). Yet, it also suggests that marketers may hint to consumers a price to be used as a reference price (e.g., an advertised price anchor) and thus influence consumers’ value judgements.

We often observe and think of discounts as a difference between an actual price (‘only this week’) and a higher normal price — in this case we may construe the acquisition value and transaction value as two ways to perceive gain on the actual price concurrently. But the model of Thaler is more general because it recognizes a range of prices that may be employed as a reference by consumers. In addition, a list price may be suspected to be set higher to invoke in purpose the perception of a gain vis-à-vis the actual discounted price which in practice is more regular than the list price. A list price or an advertised price may also serve primarily as a cue for the quality of the product (and perhaps also influence the equivalent value of the product for less knowledgeable consumers), while an actual selling price provides a transaction value or utility. In the era of e-commerce, consumers also appear to use the price quoted on a retailer’s online store as a reference; then they may visit one of its brick-and-mortar stores, where they hope to obtain their desired product faster, and complain if they discover that the price for the same product in-store is much higher. Where customers are increasingly grudging over delivery fees and speed, a viable solution to secure customers is to offer a scheme of ‘click-and-collect at a store near you’. Moreover, when more consumers shop with a smartphone in their hands, the use of competitors’ prices or even the same retailer’s online prices as references is likely to be even more frequent and ubiquitous.


  • The next example may help further to illustrate the potentially compound task of evaluating offerings: Jonathan arrives to the agency of a car dealer where he intends to buy his next new car of favour, but there he finds out that the price on offer for that model is $1,500 higher than a price he saw two months earlier in ads. The sales representative claims prices by the carmaker have risen lately. However, when proposing a digital display system (e.g., entertainment, navigation, technical car info) as an add-on to the car, the seller proposes also to give Jonathan a discount of $150 on its original price tag.
  • Jonathan appreciates this offer and is inclined to segregate this saving apart from the additional pay for the car itself (i.e., ‘silver-lining’). The transaction value may be expanded to include two components (separating the evaluations of the car offer and add-on offer completely is less sensible because the add-on system is still contingent on the car).

Richard Thaler contributed to the revelation, understanding and assessment of implications of additional cognitive and behavioural phenomena that do not stand in line with rationality in the economic sense. At least some of those phenomena have direct implications in the context of mental accounting.

One of the greater acknowledged phenomena by now is the endowment effect. It is the recognition that people value an object (product item) already in their possession more than when having the option of acquiring the same object. In other words, the monetary compensation David would be willing to accept to give up on a good he holds is higher than the amount he would agree to pay to acquire it —  people principally have a difficulty to give up on something they own or endowed with (no matter how they originally obtained it). This effect has been most famously demonstrated with mugs, but to generalise it was also tested with other items like pens. This effect may well squeeze into consumers’ considerations when trying to sell much more expensive properties like their car or apartment, beyond an aim to make a financial gain. In his latest book on behavioural economics, ‘Misbehaving’, Thaler provides a friendly explanation with graphic illustration as to why fewer transactions of exchange occur between individuals who obtain a mug and those who do not, due to the endowment effect vis-à-vis a prediction by economic theory (3).

Another important issue of interest to Thaler is fairness, such as when it is fair or acceptable to charge a higher price from consumers for an object in shortage or hard to obtain (e.g., shovels for clearing snow on the morning after a snow storm). Notably, the perception of “fairness” may be moderated depending on whether the rise in price is framed as a reduction in gain (e.g., a discount of $2o0 from list price being cancelled for a car in short supply) or an actual loss (e.g., an explicit increase of $200 above the list price) — the change in actual price is more likely to be perceived as acceptable in the former case than the latter (4). He further investigated fairness games (e.g., Dictator, Punishment and Ultimatum). Additional noteworthy topics he studied are susceptibility to sunk cost and self-control.

  • More topics studied by Thaler can be traced by browsing his long list of papers over the years since the 1970s, and perhaps more leisurely through his illuminating book: “Misbehaving: The Making of Behavioural Economics” (2015-16).

The tactics of nudging, as part of choice architecture, are based on lessons from the anomalies and biases in consumers’ procedures of judgement and decision-making studied by Thaler himself and others in behavioural economics. Thaler and Sunstein looked for ways to guide or lead consumers to make better choices for their own good — health, wealth and happiness — without attempting to reform or alter their rooted modes of thinking and behaviour, which most probably would be doomed to failure. Their clever idea was to work within the boundaries of human behaviour to modify it just enough and in a predictable way to put consumers on a better track to a choice decision. Nudging could mean diverting a consumer from his or her routine way of making a decision to arrive to a different, expectedly better, choice outcome. It often likely involves taking a consumer out of his or her ‘comfort zone’. Critically important, however, Thaler and Sunstein conditioned in their book ‘Nudge’ that: “To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates“. Accordingly, nudging techniques should not impose on consumers the choice of any designated or recommended options (5).

Six categories of nudging techniques are proposed: (1) defaults; (2) expect errors; (3) give feedback; (4) understanding “mappings”; (5) structure complex choices; and (6) incentives. In any of these techniques, the intention is to allow policy makers to direct consumers to choices that improve the state of consumers. Yet, the approach they advocate of ‘libertarian paternalism’ is not received without contention —  while libertarian, that is without coercing a choice, a question remains what gives an agency or policy maker the wisdom and right to determine which options should be better off for consumers (e.g., health plans, saving and investment programmes). Thaler and Sunstein discuss the implementation of nudging mostly in the context of public policy (i.e., by government agencies) but these techniques are applicable just as well to plans and policies of private agencies or companies (e.g., banks, telecom service providers, retailers in their physical and online stores). Nevertheless, public agencies and even more so business companies should devise and apply any measures of nudging to help consumers to choose the better-off and fitting plans for them; it is not for manipulating the consumers or taking advantage of their human errors and biases in judgement and decision-making.

Richard Thaler reviews and explains in his book “Misbehaving” the phenomena and issues he has studied in behavioural economics through the story of his rich research career — it is an interesting, lucid and compelling story. He tells in a candid way about the stages he has gone through in his career. Most conspicuously, this story also reflects the obstacles and resistance that faced behavioural economists for at least 25-30 years.

Congratulations to Professor Richard Thaler, and to the field of behavioural economics to which he contributed wholesomely, in theory and in its application.    

Ron Ventura, Ph.D. (Marketing)

Notes:

(1) Toward a Positive Theory of Consumer Choice; Richard H. Thaler, 1980/2000; in Choices, Values and Frames (eds. Daniel Kahneman and Amos Tversky)[Ch. 15: pp. 269-287], Cambridge University Press. (Originally published in Journal of Economic Behaviour and Organization.)

(2) Mental Accounting and Consumer Choice; Richard H. Thaler, 1985; Marketing Science, 4 (3), pp. 199-214.

(3) Misbehaving: The Making of Behavioural Economics; Richard H. Thaler, 2016; UK: Penguin Books (paperback).

(4) Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias; Daniel Kahneman, Jack L. Knetsch, & Richard H. Thaler, 1991/2000; in Choices, Values and Frames (eds. Daniel Kahneman and Amos Tversky)[Ch. 8: pp. 159-170], Cambridge University Press. (Originally published in Journal of Economic Perspectives).

(5) Nudge: Improving Decisions About Health, Wealth, and Happiness; Richard H. Thaler and Cass R. Sunstein, 2009; UK: Penguin Books (updated edition).

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People have difficulty assessing the value of a non-tangible asset like knowledge. How does one grasp the breadth and quality of a knowledgebase contained in an encyclopedia, especially when it is built within a website and spread across thousends of webpages? Superficial as it may sound, the look of the book volumes of an encyclopedia served consumers as an easy and immediate cue to grasp the amount of knowledge in the series as a whole and in each volume. Of even greater import, a prospect buyer could turn pages back and forth, get impressed by the many entries in a book volume, and have a quick read or glance at drawings and photos to asses the quality of content. Turning paper pages in a book does not feel quite the same as ‘jumping’ pages on a website.

Now as before, one may gather additional information on the editorial board, choice of contributors, and the editorial process of the encyclopedia for greater assurance of the quality of knowledge it offers. But it is not certain that people have appreciation for  those assurances of the quality of content and expertise of contributors. Wikipedia, the free online encyclopedia, changed the way such a knowledgebase is constructed on the Internet and created much trouble for the old-class encyclopedias like Encyclopaedia Britannica. It has particularly put into question the value of the traditional editorial process of an encyclopedia.

On the other hand, digital technologies, first on CD-ROM and later also on the Web, introduced consumers to new features and associated benefits in searching for information and browsing content in encyclopedias. Such features include primarily search engines, advanced navigation tools (interactive graphics), hyperlinks, and multimedia capabilities like hearing soundtracks and viewing videos . The tools for using knowledge are becoming more valid sources of value that publishers are able to price rather than the content of knowledge.

Last month the Encyclopaedia Britannica announced that it was ending its print edition after 244 years since its establishment. The last edition is the 2010 version which contains 32 volumes and entails entries on contemporary topics as global warming and the Human Genome Project. From now 0n the publisher will concentrate on the web-based encyclopedia. The president of Britannica, Jorge A. Cauz, says it is continuously updated, is much more expansive, and includes multimedia (1). A DVD version is also available. Many if not most entries are already available for access free-of-charge on the Web. The paid-for online edition also offers, for instance, links to external websites trusted by Encyclopaedia Britannica, accsess to an archive of historical documents, atlas and maps, and statistics.

The Encyclopaedia Britannica takes pride in 4,000 experts carefully chosen by the editorial board for writing articles in their domains of expertise. Furthermore,  Britannica (as well as World Book or Groiler)  publish scholarly peer-reviewed articles as acceptable in academic literature. Wikipedia in contrast is a “crowd source” knowledgebase where almost anyone is invited to write an entry ; other members in the community of authors enter comments and corrections or may add information. The whole process is subject to approval by an editorial supervisor. Nonetheless, the inclarity regarding the credentials of authors sometimes shows in incoherent articles that are complex yet poorly structured, featuring occasional inconsistencies, and including frequent notes demanding clarifications or corroborative citations. Wikipedia often appears excessively dynamic to the extent that an intelligent reader may feel uncertain in relying on its information. Any encyclopedia is best referred to as an initial source for becoming familiar with a concept, but learners should then look for additional and more comprehensive sources of knowledge to develop their own knowledge of the domain and obtain more perspectives. With Wikipedia it is imperative to seek other information sources on the domain of interest (e.g., learning for general knowledge beyond a basic idea, writing a school/college paper, preparing a work project).

The advantages of the traditionally composed encyclopedias may be obvious to their editors and publishers but they seem to be much less clear to their audiences. Moreover, users of knowledge sources online are not so willing to pay for those advantages as information is abundant on the Internet for free and the users, especially the younger ones, lack either the skills for critics and scrutiny or the motivation to apply them properly.

The print edition of Britannica is offered for $1,400 [£1,200](2) and is purchased in recent years almost solely by institutions. The DVD version is sold for $40 [£40]! Annual subscription to Britannica Online stands at $70 [£50].  Even if we assume that a DVD is adequately accurate for three years, buying three editions over a period of 10 years will come to a nominal cost of £120, tenth of the price of a print edition which may be reliable enough for the extended period of time. Meanwhile, buying ten annual subscriptions to a continuously updated knowledgebase would cost us at present prices nominally £500. Take into consideration that the present value of payments made years ahead is lower than their nominal monetary values given above, that digital sources include many dynamic features unavailable in print, and that fresher information can be obtained online, then one realises how much less consumers are required to pay for the content of knowledge in Britannica in the new digital media compared with the old print medium.

Let us clear-up the price differences between media a little further. In the 1990’s it cost  $250 on average to produce a set of books (3). It has left approximately $1,000-1,200 of selling price to account for the value of knowledge delivered in Encyclopaedia Britannica. Scholars and experts have always been strongly interested in writing entries in Britannica, willing to receive just small fees. This can explain in part how it will have been possible in coming years to reduce the price to consumers. But if in those years  knowledge was possibly over-priced, now knowledge may become under-priced.

When Encyclopedia Britannica finally issued an encyclopedia in digital format on CD-ROM in 1989, it was done under the name of its “sister” Compton (i.e., in fear of diluting its own brand). The CD was provided free to purchasers of the print encyclopedia, but offered at a hefty price of $895 to those interested only in the new digital format (4). The cost of the physical CD is immaterial and so $900 may account for the value of knowledge (including writing, editing, plus configuring content in a digital, multimedia format). That was not received well by consumers who thought it was much above its value to them, and even more so under the name of Compton. Microsoft who were interested in publishing a digital encyclopedia, but not in writing one, were rejected by both Britannica and World Book before associating with a failing encyclopedia (Funk & Wagnall). And yet its multimedia CD-ROM Encarta sold successfully in the mid 1990 for just $100 (5) (it was also distributed as a free add-on to Windows). (more…)

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