Optimal Design of Consumer Contest
Posted: 12 Sep 2005
Date Written: May 16, 2005
Abstract
A consumer contest is a sales promotion technique that requires participants to apply certain skills as they compete for prizes or awards. Consumer contests are increasingly used in such markets as the fast-growing mobile entertainment industry. We study a one-period model of consumer contest in which consumers' performance is a multiplicative function of their skill and consumption, and the marketer maximizes profits from the aggregate consumption. This paper is the first to employ a game-theoretical approach to investigate consumer contest design issues. We find that the optimal (profit-maximizing) prize structure is either for the winner to take all or for multiple winners to take equal prizes. A winner-take-all prize structure is optimal when the hazard rate of the skill distribution increases. Intuitively, increasing hazard rate implies fiercer competition (thus more consumption) at high-skill levels, and the first prize is most effective in inducing aggregate consumption by high-skilled consumers. Furthermore, when there are many contestants, an increasing (and higher) hazard-rate at high-skill levels is sufficient for winner-take-all prize structure to be optimal. We also find that, as consumers' skill levels become less dispersive, meaning they have more equal skill levels, they will compete more aggressively - to the marketer's benefit. This provides a rationale for the marketer to handicap high-skilled consumers and to segment consumers based on their skill levels. Yet, we do not find segmenting based on non-skill factors, such as geographic regions, to increase the marketer's profits. Finally, when consumers derive little intrinsic value from consumption, the marketer can benefit from charging an entry fee.
Keywords: consumer contests, prize structure, segmentation, handicapping, entry fee
JEL Classification: D44, M31
Suggested Citation: Suggested Citation