By Kirk Kardashian
Published Dec 03, 2013
Marketing professor Praveen Kopalle won the 2014 Davidson Award for a paper on retail pricing policies.
The Journal of Retailing announced recently that its 2014 Davidson Award, for the best paper published in the journal in 2012, went to Tuck Professor of Marketing Praveen Kopalle and co-authors P.K. Kannan, Lin Bao Boldt, and Neeraj Arora. Their paper, “The Impact of Household Level Heterogeneity in Reference Price Effects on Optimal Retailer Pricing Policies,” received the most votes from an award committee made up some 60 members of the journal’s Editorial Review Board and associate editors.
According to Shankar Ganesan, a professor at the Mendoza College of Business at Notre Dame, and the editor-in-chief of the Journal of Retailing, the paper was selected as the winner for its “originality, technical competence, and a strong contribution to the theory and practice of retailing.”
“Household-level heterogeneity” is a term of art in marketing research, but in simple terms it means that different households behave differently. One behavior that retailers have long desired to better understand is how individual households adjust their buying when store prices go up or down. For most of retail history, stores had to assume all their customers reacted similarly to price changes.
With the advent of loyalty programs, however, stores began collecting valuable data that could connect their customers’ shopping patterns to changes in prices. If analyzed correctly, this data could show consumers’ price sensitivity—the point at which a change in price causes a consumer to alter his purchasing behavior—and how that sensitivity could be impacted by consumers’ “reference price,” or their preconceived notion of the price of a certain item. These reference prices change over time and are a function of past prices.
What Kopalle and his co-authors have done in their paper is create a model that uses household-level price sensitivity data, in concert with statistical estimations of reference prices (it’s nearly impossible to know references prices with any certainty), to produce optimal prices that maximize store profitability. The results from their model showed significant increases in profitability as compared to previous models that ignore heterogeneity. In essence, the more granular analysis of household purchasing behavior, combined with an estimation algorithm, has yielded new insight into how stores should set prices.
“I was really thrilled to receive this award for two reasons: I wasn’t expecting it and it is one of my favorite papers,” said Kopalle, who is the area chair of Tuck’s marketing faculty, and teaches the core course Statistics for Managers and the elective Retail Pricing Strategy and Tactics. “The journal publishes something like 60 papers per year, and to rise above that and be recognized by the marketing community is a real honor.”
Kopalle and his co-authors will be presented with the Davidson Award at the American Marketing Association Winter Conference in Orlando, Fla., in February.