Management Science

Rajan, Madhav V.; Reichelstein, Stefan

doi: 10.1287/mnsc.1040.0285pmid: N/A

The paper “Asymmetric Information, Incentives and Intrafirm Resource Allocation,” by Harris, Kriebel, and Raviv, was published in the June 1982 issue of Management Science. In this article, written as part of this journal's 50-year anniversary celebration, we highlight the significance of the Harris et al. paper for research in managerial accounting. We first formulate and solve a continuous version of the Harris et al. model to illustrate the key assumptions and findings of their paper. We then review several strands of the resource-allocation literature in managerial accounting that have taken their inspiration, either directly or indirectly, from the work of Harris et al.

Dye, Ronald A.

doi: 10.1287/mnsc.1030.0160pmid: N/A

This paper studies a manager's attempt to maximize his firm's discounted expected profits by choosing what strategic actions to select and what performance measurement system to employ in a setting where the manager is uncertain about what variables “drive” the firm's profits, the firm's profit drivers remain stationary over time, and strategic actions differ in the amount of information they produce about the firm's profit drivers. For each available performance measurement system, this paper identifies necessary and sufficient conditions for experimentation—that is, deviating from the firm's short-run expected profit-maximizing action—to be optimal. In addition, the paper determines what factors influence a firm's preferred performance measurement system, and it explains why the preferred performance measurement system is likely to change over time.

Mittendorf, Brian

doi: 10.1287/mnsc.1040.0260pmid: N/A

The real options approach to capital budgeting focuses on valuing benefits of project flexibility. This paper presents an incentive consideration in such valuation. Operating flexibility not only allows a firm to change course in response to new information, but also allows interested observers to make inferences based on the change in course (or lack thereof). Such information conveyance through refined operating choices can alter observers' incentives. As a result, an option to delay may prove valuable because it allows a firm to prolong informational advantages.

Melumad, Nahum D.; Ziv, Amir

doi: 10.1287/mnsc.1040.0277pmid: N/A

We study a model of imperfect competition and limited production capacity in which a key feature is the trade-off between quality and quantity. In particular, lowering product quality enables firms to increase total production. We illustrate that, in the presence of limited capacity, the choice of lower quality often results in increased social welfare. We also explore the relation between the extent of competition and the choice of quality. We find that, in some cases, reduced competition leads to increased production, decreased average quality, increased total welfare, and makes consumers better off. Finally, we consider the possibility of regulator-mandated quality standards. Imposing high-quality standards never improves welfare in our model. On the other hand, mandating an upper bound on quality could either increase or decrease welfare in either a monopoly or a duopoly market.

Sundararajan, Arun

doi: 10.1287/mnsc.1040.0291pmid: N/A

This paper analyzes optimal pricing for information goods under incomplete information, when both unlimited-usage (fixed-fee) pricing and usage-based pricing are feasible and administering usage-based pricing may involve transaction costs. It is shown that offering fixed-fee pricing in addition to a nonlinear usage-based pricing scheme is always profit improving in the presence of nonzero transaction costs, and there may be markets in which a pure fixed-fee is optimal. This implies that the optimal pricing strategy for information goods is almost never fully revealing. Moreover, it is proved that the optimal usage-based pricing schedule is independent of the value of the fixed fee, a result that simplifies the simultaneous design of pricing schedules considerably and provides a simple procedure for determining the optimal combination of fixed-fee and nonlinear usage-based pricing. The introduction of fixed-fee pricing is shown to increase both consumer surplus and total surplus. The differential effects of setup costs, fixed transaction costs, and variable transaction costs on pricing policy are described. These results suggest a number of managerial guidelines for designing pricing schedules. For instance, in nascent information markets, firms may profit from low fixed-fee penetration pricing, but as these markets mature, the optimal pricing mix should expand to include a wider range of usage-based pricing options. Minimum fees, quantity discounts, and adoption levels across the different pricing schemes are characterized, strategic pricing responses to changes in market characteristics are described, and the implications of the paper's results for bundling and vertical differentiation of information goods are discussed.

Sosa, Manuel E.; Eppinger, Steven D.; Rowles, Craig M.

doi: 10.1287/mnsc.1040.0289pmid: N/A

Product architecture knowledge is typically embedded in the communication patterns of established development organizations. While this enables the development of products using the existing architecture, it hinders the organization's ability to implement novel architectures, especially for complex products. Structured methods addressing this issue are lacking, as previous research has studied complex product development from two separate perspectives: product architecture and organizational structure. Our research integrates these viewpoints with a structured approach to study how design interfaces in the product architecture map onto communication patterns within the development organization. We investigate how organizational and system boundaries, design interface strength, indirect interactions, and system modularity impact the alignment of design interfaces and team interactions. We hypothesize and test how these factors explain the existence of the following cases: (1) known design interfaces not addressed by team interactions, and (2) observed team interactions not predicted by design interfaces. Our results offer important insights to managers dealing with interdependences across organizational and functional boundaries. In particular, we show how boundary effects moderate the impact of design interface strength and indirect team interactions, and are contingent on system modularity. The research uses data collected from a large commercial aircraft engine development process.

Bhuiyan, Nadia; Gerwin, Donald; Thomson, Vince

doi: 10.1287/mnsc.1040.0309pmid: N/A

This paper explores the linkages between key features of the new product development (NPD) process and NPD performance and suggests ways of designing the process to improve performance. Using a stochastic computer model, we examine, under varying uncertainty conditions, how the key features of overlapping and functional interaction affect the performance measures of development time and effort (total person-days for a project). Findings indicate that, first and foremost, whether or not overlapping occurs, increasing functional interaction eventually leads to a trade-off between development time and effort. Second, an “early-start-in-the-dark” approach of increasing overlapping with no functional interaction is inferior even to an “over-the-wall” approach. Third, increasing overlapping when some functional interaction exists is beneficial in low uncertainty and harmful in high uncertainty. Fourth, concurrent engineering (CE) is appropriate under low uncertainty, while a type of sequential engineering (SE), different than the “over-the-wall” approach, should be used under high uncertainty, and last, dedicated teams are suitable under high, and not low, uncertainty. We developed the model with the aid of a company and validated it against a published account of five case studies.

Mizik, Natalie; Jacobson, Robert

doi: 10.1287/mnsc.1040.0281pmid: N/A

Much public attention and considerable controversy surround pharmaceutical marketing practices and their impact on physicians. However, views on the matter have largely been shaped by anecdotal evidence or results from analyses with insufficient controls. Making use of a dynamic fixed-effects distributed lag regression model, we empirically assess the role that two central components of pharmaceutical marketing practices (namely, detailing and sampling) have on physician prescribing behavior. Key differentiating features of our model include its ability to (i) capture persistence in the prescribing process and decompose it into own-growth and competitive-stealing effects, (ii) estimate an unrestricted decay structure of the promotional effects over time, and (iii) control for physician-specific effects that, if not taken into account, induce biased coefficient estimates of detailing and sampling effects. Based on pooled time series cross-sectional data involving three drugs, 24 monthly observations, and 74,075 individual physicians (more than 2 million observations in total), we find that detailing and free drug samples have positive and statistically significant effects on the number of new prescriptions issued by a physician. However, we find that the magnitudes of the effects are modest.

Kalnins, Arturs; Mayer, Kyle J.

doi: 10.1287/mnsc.1040.0220pmid: N/A

We hypothesize that retail and service business units will enjoy reduced failure rates if affiliated with experienced multiunit owners and franchisors. Experience of individual owners and franchisees should result in knowledge that is tacit and idiosyncratic and thus primarily of value locally. Because franchisors typically codify knowledge gained from experience, we argue that units should benefit from both local and distant experience of their franchisor. Using Texan pizza restaurant failure data, we found that the units of all multiunit owners, franchised or not, benefited from their owner's local congenital experience, but not from distantly gained experience. Further, the franchisor's local experience reduced failure rates. Contrary to one hypothesis, franchisors' distant experience did not prove beneficial. In addition, a complementary effect was found for owner and franchisor congenital experience. These results highlight the continued importance of local experience, even among the most codified and standardized business organizations.

Bollapragada, Ramesh; Rao, Uday S.; Zhang, Jun

doi: 10.1287/mnsc.1040.0314pmid: N/A

We consider stock positioning in a pure assembly system controlled using installation base-stock policies. When component suppliers have random capacity and end-product demand is uncertain, we characterize the system's inventory dynamics. We show that components and the end product play convex complementary roles in providing customer service. We propose a decomposition approach that uses an internal service level to independently determine near-optimal stock levels for each component. Compared with the optimal, the average error of the decomposition approach is 0.66% across the tested instances. Compared with current practice, this approach has the potential to reduce the safety-stock cost by as much as 30%. Our computational analysis on two-echelon systems also illustrates several managerial insights: We observe that the cost reduction from improving supply performance is high when demand variability or the number of components or target customer service is high, or when the end product is more expensive relative to components. On average, (i) reducing the lead time of the more expensive component yielded higher benefit than reducing the lead time for the less expensive component, and (ii) the benefit of improving one of the supply parameters (service level or lead time) was higher when the value of the other parameter was already more favorable (lower lead time or higher service level, respectively). Finally, we analytically show how a multi-echelon pure assembly system may be converted into an equivalent two-echelon assembly system to which all our results apply.