Management Science

doi: 10.1287/mnsc.1070.0738pmid: N/A

Anand, Krishnan S.; Girotra, Karan

doi: 10.1287/mnsc.1060.0655pmid: N/A

The value of delayed differentiation (also known as postponement) for a monopolist has been extensively studied in the operations literature. We analyze the case of (imperfectly) competitive markets with demand uncertainty, wherein the choice of supply chain configuration (i.e., early or delayed differentiation) is endogenous to the competing firms. We characterize firms choices in equilibrium and analyze the effects of these choices on quantities sold, profits, consumer surplus, and welfare. We demonstrate that purely strategic considerations not previously identified in the literature play a pivotal role in determining the value of delayed differentiation. In the face of either entry threats or competition, these strategic effects can significantly diminish the value of delayed differentiation. In fact, under plausible conditions, these effects dominate the traditional risk-pooling benefits associated with delayed differentiation, in which case early differentiation is the dominant strategy for firms, even under cost parity with delayed differentiation. We extend the main model to study the effects of alternate market structures, asymmetric markets, and inventory holdback. Our resultsin particular that for a broad range of parameter values, early differentiation is a dominant strategy even under cost parity with delayed differentiationare robust to these relaxations.

Liu, Liming; Parlar, Mahmut; Zhu, Stuart X.

doi: 10.1287/mnsc.1060.0653pmid: N/A

This paper studies a decentralized supply chain consisting of a supplier and a retailer facing price- and lead-time-sensitive demands. A Stackelberg game is constructed to analyze the price and lead time decisions by the supplier as the leader and the retailer as the follower. The equilibrium strategies of the two players are obtained. Using the performance of the corresponding centralized system as a benchmark, we show that decentralized decisions in general are inefficient and lead to inferior performance due to the double marginalization effect. However, further analysis shows that the decision inefficiency is strongly influenced by market and operational factors, and if the operational factors are dominating, it may not be significant. This shows that before pursuing a coordination strategy with retailers, a supplier should first improve his or her own internal operations.

Su, Xuanming

doi: 10.1287/mnsc.1060.0667pmid: N/A

This paper develops a model of dynamic pricing with endogenous intertemporal demand. In the model, there is a monopolist who sells a finite inventory over a finite time horizon. The seller adjusts prices dynamically to maximize revenue. Customers arrive continually over the duration of the selling season. At each point in time, customers may purchase the product at current prices, remain in the market at a cost to purchase later, or exit, and they wish to maximize individual utility. The customer population is heterogeneous along two dimensions: they may have different valuations for the product and different degrees of patience (waiting costs).We demonstrate that heterogeneity in both valuation and patience is important because they jointly determine the structure of optimal pricing policies. In particular, when high-value customers are proportionately less patient, markdown pricing policies are effective because the high-value customers would buy early at high prices while the low-value customers are willing to wait (i.e., they are not lost). On the other hand, when the high-value customers are more patient than the low-value customers, prices should increase over time to discourage inefficient waiting. Contrary to intuition, we find that strategic waiting by customers may sometimes benefit the seller: when low-value customers wait, they compete for availability with high-value customers and thus increase their willingness to pay. Our results also shed light on how the composition of the customer population affects optimal revenue, consumer surplus, and social welfare. Finally, we consider the long-run problem of selecting the optimal initial stocking quantity.

Mendelson, Haim; Tunca, Tunay I.

doi: 10.1287/mnsc.1060.0649pmid: N/A

In a variety of industries ranging from agriculture to electronics and oil, procurement takes place through a combination of bilateral fixed-price contracts and open market trading among supply chain participants, which allows them to improve supply chain performance by utilizing new demand and cost information. The strategic behavior of the participants in these markets interacts with the way fixed-price contracts are formulated and significantly affects supply chain efficiency. In this paper, we develop a strategic model that allows endogenous price formation in an industrial spot market where supply chain participants have private information. Utilizing the model, we analyze the equilibrium of a dynamic game between a single supplier and multiple manufacturers who first contract with the supplier at a fixed price and then trade on a spot market. We study how such trading affects supply chain performance and show that it does not eliminate fixed-price contracting even though the fixed price is determined under inferior information. We find that it reduces prices, increases the quantities produced, and improves supply chain profits and consumer surplus. However, depending on the information structure of the supply chain, spot trading may make either the supplier or the manufacturers worse off. Our results show how the informational regime affects the profitability of supply chain participants and the allocation of quantities between the procurement venues. We show that beyond a threshold level, the effect of increasing supply uncertainty, or decreasing either the demand uncertainty or the information asymmetry among the manufacturers, is to increase the percentage procured on the spot market as well as the overall quantity procured and sold, and to decrease prices. As the number of manufacturers increases, procurement shifts from fixed-price contracting to spot trading and in the limit, the supply chain is both fully coordinated and informationally efficient. We also show that in many cases, the supplier may gain strategic advantage by sharing some of her cost information with the manufacturers.

Alccer, Juan; Chung, Wilbur

doi: 10.1287/mnsc.1060.0637pmid: N/A

Given the importance of proximity for knowledge spillovers, we examine firms location choices expecting differences in firms strategies. Firms will locate to maximize their net spillovers as a function of locations knowledge activity, their own capabilities, and competitors anticipated actions. Using new entrants into the United States from 1985 to 1994, we find that firms favor locations with academic innovative activity. Other results highlight differences in firms location strategies suggesting that firms consider not only gains from inward knowledge spillovers but also the possible cost of outward spillovers. While less technologically advanced firms favor locations with high levels of industrial innovative activity, technologically advanced firms choose only locations with high levels of academic activity and avoid locations with industrial activity to distance themselves from competitors.

Aviv, Yossi

doi: 10.1287/mnsc.1060.0654pmid: N/A

This paper studies the potential benefits of collaborative forecasting (CF) partnerships in a supply chain that consists of a manufacturer and a retailer. To reflect the reality in production environments, we propose a scorecard that captures inventory considerations, production smoothing, and adherence-to-plans. We present a prescriptive convex-cost production planning model for the manufacturer, and a replenishment model for the retailer. We use our integrative reference model to study the potential benefits of CF partnerships. Overall, we find that the benefits of CF depend on the following key characteristics of the supply chain: the relative explanatory power of the supply chain partners, the supply side agility, and the internal service rate. CF is expected to bring high benefits to the supply chain when the manufacturer has the largest relative explanatory power. But quite disappointingly, in these cases a CF partnership does not appear to be valuable to the manufacturer. When the retailer is the dominant observer of market signals, CF typically yields a win-win outcome. In order to effectively act upon the information exchanged via CF, the supply side needs to be sufficiently agile. The benefits reported in this paper should be considered as conservative. This is because CF partnerships often bring better information, improved decision support technologies, as well as process improvement to the trading partners. Consequently, the supply side agility can be improved. If this indeed happens, the compound benefits of CF can be dramatically higher than our conservative estimates. Finally, we provide a qualitative discussion of the possible role of internal service rates in supply chains, either as planning parameters to improve performance, or as a mechanism for sharing the benefits of CF between the trading partners.

Caldentey, Ren; Vulcano, Gustavo

doi: 10.1287/mnsc.1060.0646pmid: N/A

We analyze a revenue management problem in which a seller facing a Poisson arrival stream of consumers operates an online multiunit auction. Consumers can get the product from an alternative list price channel. We consider two variants of this problem: In the first variant, the list price is an external channel run by another firm. In the second one, the seller manages both the auction and the list price channels.Each consumer, trying to maximize his own surplus, must decide either to buy at the posted price and get the item at no risk, or to join the auction and wait until its end, when the winners are revealed and the auction price is disclosed.Our approach consists of two parts. First, we study structural properties of the problem, and show that the equilibrium strategy for both versions of this game is of the threshold type, meaning that a consumer will join the auction only if his arrival time is above a function of his own valuation. This consumers strategy can be computed using an iterative algorithm in a function space, provably convergent under some conditions. Unfortunately, this procedure is computationally intensive.Second, and to overcome this limitation, we formulate an asymptotic version of the problem, in which the demand rate and the initial number of units grow proportionally large. We obtain a simple closed-form expression for the equilibrium strategy in this regime, which is then used as an approximate solution to the original problem. Numerical computations show that this heuristic is very accurate. The asymptotic solution culminates in simple and precise recipes of how bidders should behave, as well as how the seller should structure the auction, and price the product in the dual-channel case.

Gallien, Jrmie; Gupta, Shobhit

doi: 10.1287/mnsc.1060.0650pmid: N/A

Buyout options allow bidders to instantly purchase at a specified price an item listed for sale through an online auction. A temporary buyout option disappears once a regular bid is submitted, whereas a permanent option remains available until it is exercised or the auction ends. Such buyout price may be static and remain constant throughout the auction, or dynamic and vary as the auction progresses. We formulate a game-theoretic model featuring time-sensitive bidders with independent private values and Poisson arrivals but endogenous bidding times to answer the following questions: How should a seller set the buyout price (if at all)? What are the implications of using a temporary buyout option relative to a permanent one? What is the potential benefit associated with using a dynamic buyout price? For all buyout option types we exhibit a Nash equilibrium in bidder strategies, argue that this equilibrium constitutes a plausible outcome prediction, and study the problem of maximizing the corresponding seller revenue. Our numerical experiments suggest that when any participant is time sensitive, the seller may significantly increase his utility by introducing a buyout option, but that dynamic buyout prices may not provide a substantial advantage over static ones. Furthermore, whereas permanent buyout options yield higher predicted revenue than temporary options, they also provide additional incentives for late bidding and may therefore not be always more desirable.

Kocabykolu, Aye; Popescu, Ioana

doi: 10.1287/mnsc.1060.0640pmid: N/A

Firms can increase profitability by appropriately motivating managers. We investigate drivers of managerial motivation, and propose how firms can use performance pay to alter motivational patterns. We focus on the agents optimal effort decision in trading off compensation utility with effort cost in a static and dynamic setting. Surprisingly, we find that lower risk aversion or increased pay are not necessarily motivating factors, and identify the relevant effort drivers underlying the agents utility and compensation plan. We characterize properties of agents preferences for output lotteries (risk aversion, aggressiveness, prudence) that trigger systematic motivational patterns with respect to a variety of factors, such as the agents productivity and past performance, time to evaluation, the firms capabilities, and market factors. Our insights are robust, holding under very general modeling assumptions on preferences, rewards, and the stochastic effort-output function.