Consumer Preferences and Firm Technology Choice

Yi Liu, Z. John Zhang, and Pinar Yildirim, Marketing, The Wharton School

Abstract: Advances in intelligent technologies change the way consumers search and shop for products. Emerging is the trend of home-shopping devices such as Amazon’s Alexa and Google Home, which allow consumers to search or order products using voice commands. We study the impact of such artificial intelligence (AI) enabled devices on a brand’s channel strategy and its price discrimination across these channels. After making a theoretical breakdown of the functionalities of the AI-enabled shopping devices into (1) adding convenience in ordering procedure (“OC”) and (2) providing support in purchase decisionmaking (“DS”), we document via a set of experiments that consumers who have strong (weak) shopping preferences are less-inclined to shop through AI-enabled devices with the functionality of DS (OC) compared to their existing shopping heuristics. The hesitation of the group to adopt AI-enabled shopping devices makes it efficient for a brand operating in a competitive environment to price discriminate across distribution channels. In the second part of the paper, we build an analytical model and derive the equilibrium distribution and pricing strategies for competing brands conditional on the heterogeneity of consumers with respect to their willingness to adopt AI-enabled devices. We also analyze the welfare impact of the introduction of AI technology as a new possible distribution channel.

Read the full working paper here (PDF).