We study the determinants of dealer effort and manufacturers' incentive choice in an emerging mar... more We study the determinants of dealer effort and manufacturers' incentive choice in an emerging market and examine how the choice of manufacturer incentive and other market/demographic factors in the emerging market affect dealers' effort level and the profit of both-side channel members. Using data collected on power-tool industry from a leading international brand in Indian market, we provide evidence that …. Our analysis suggests that ….
Many products considered for remanufacturing are durable that exhibit a well-pronounced prod- uct... more Many products considered for remanufacturing are durable that exhibit a well-pronounced prod- uct life cycle - they diffuse gradually through the market. The remanufactured product, which is a cheaper substitute for the new product, is often put on the market during the life cycle of the new product and affects its sales dynamics. In this paper, we study the integrated
Taking advantage of lower foreign tax rates using transfer pricing and taking advantage of lower ... more Taking advantage of lower foreign tax rates using transfer pricing and taking advantage of lower production costs using offshoring are two strategies that global companies use to increase their profitability. Evidence suggests that firms employ these strategies independently. We study how global firms can jointly leverage tax and cost differences through coordinated transfer pricing and offshoring. We derive a trade-off curve between tax and cost differences that can be used to design sourcing and transfer pricing strategies jointly. However, in a global firm the implementation of such jointly optimal strategies is often hindered by the following incentive problem. The headquarters is more concerned about the consolidated after tax profits than the local divisions. Local divisions, on the other hand, have a better view on the product cost structure and hence, have a better view on the appropriate sourcing strategies. Hence, we need to understand how different transfer price strategi...
We consider a strategic queuing game for services with a credence good character. These are servi... more We consider a strategic queuing game for services with a credence good character. These are services for which the customers cannot verify how much time is required to address their needs. Examples are taxicab rides, legal advice or repair services. Customers arrive according to a Poisson process. The service rate is exponential and can be changed between two bounds, at no cost, as a function of the number of customers in the system. The customer pays to the service provider a fixed fee and a billing fee that depends on the realized service time. By slowing down the service rate, the service provider can make more billing fee revenues. The customer obtains some utility from the service, incurs dis-utility from waiting until the service is done and needs to pay the fixed fee and the time-based bill to the service provider. He decides whether to join the queue or not, after partially observing the queue length upon arrival at the service provider (whether the service provider is idlin...
... We refer to such a supply chain as a 'closed-loop supply chain,' opposed to... more ... We refer to such a supply chain as a 'closed-loop supply chain,' opposed to an 'open-loop supplychain,' in which there is no flow back from the customer. Reverse logistics is the group of activities ... chains.” In: Quantitative Models for Closed Loop Supply Chain Management. Eds. ...
Operations of publicly traded firms differ from privately owned firms because public firms' manag... more Operations of publicly traded firms differ from privately owned firms because public firms' managers make decisions based on their own interests. In this paper, we study how stock market pressure may influence a manager's inventory and operational management. Our model is a straightforward extension of a twoperiod inventory management problem with correlated demand. The manager's compensation is partially based on the firm's stock price which is influenced by the reported sales revenues. With better information about the "real" demand, the manager may manipulate the stock price by shipping more than the real demand to downstream customers and claim higher than real sales revenues using a well known form of real earnings management called "channel stuffing" or "sales padding." As it does not correspond to real demand, the padded demand will return later to the firm after additional costs are incurred. Hence, channel stuffing destroys the firm's value. Based on a game between the manager and the stock market, we identify three factors that determine the manager's incentive to use channel stuffing: the marginal incentive, the boundary effect and the carryover effect. The marginal incentive is independent of the inventory problem.
We explore customer choice behavior when they face a choice between service providers of unknown ... more We explore customer choice behavior when they face a choice between service providers of unknown service value. Customers arrive according to a Poisson process to the market. Service times are exponentially distributed with the same rate at each service provider. Both the service providers are capacitated (finite buffers), and the customers incur waiting costs when waiting for service. Customers observe decisions made by other customers in the form of queue lengths before making their choice. If more customers choose the same service, longer queues will form at the service. Therefore, the arriving customers infer service value is better at the service with the longer queue and would prefer to join the longer queue. But customers also have to suffer additional waiting costs in the longer queue before consuming the service. Furthermore, they might not even get the service at longer queue sometimes because the waiting space is full. We characterize the equilibrium queue-joining behavio...
We study an extension of a two-period inventory management problem with positively correlated dem... more We study an extension of a two-period inventory management problem with positively correlated demands in which the manager's compensation is partially based on an external, market-based assessment of the firm's value. As typically the "real" demand is only observed internally in the firm, the manager may ship more than the real demand to downstream customers and report higher than real sales revenues to influence the external firm valuation, which is known as "channel stuffing." As it is costly and does not reflect the real demand, channel stuffing destroys the firm's value. We identify three factors that drive the manager's incentives for channel stuffing: the marginal effect, the boundary effect and the carryover effect. The marginal effect, analogous to those earnings management incentives revealed in the literature (e.g., Stein, 1989), is independent of the inventory problem, while the boundary and carryover effects arise from the nature of th...
Many companies ship parts and materials from a multitude of suppliers scattered over a large area... more Many companies ship parts and materials from a multitude of suppliers scattered over a large area. Because the number of supplier relationships may be large and complex, the procurement problem is often divided among parties that scarcely coordinate. As a result, opportunities exist to reduce total logistical costs by consolidating orders and sharing trucks. For the North-American division of the Bosch/Siemens Home Appliances Corporation, we study how to design and implement such coordination while maintaining flexibility with respect to market forces and changes in demand volumes. Our proposed solution combines the incoming freight from different suppliers in what we call 'flex-runs', to better utilize truck space. The result is an expected transportation cost reduction of up to 25% with an overall increase in robustness with respect to volume fluctuations.
International Journal of Production Research, 2015
ABSTRACT As a fast growing specialty, medical telephone triage lines (nurse lines) play an import... more ABSTRACT As a fast growing specialty, medical telephone triage lines (nurse lines) play an important role in providing advice and recommendations to help ensure that medical care is delivered at the appropriate level. In this paper, we discuss the operations of these nurse lines, based on studies in the literature and interviews with nurse line researchers and practitioners. This leads us to identify issues relevant for the design and management of such lines, challenges that operations research (OR)/operations management (OM) can help address. We demonstrate that a classical call center modelling approach, focusing exclusively on congestion, will be insufficient in addressing these challenges. Thus, we motivate research on an integrated framework in which both congestion and decision-making accuracy are coupled. We summarise the limited extant research in OR/OM that is applicable to the unique challenges posed by nurse lines, highlighting these models’ contributions, as well as the questions they leave unanswered. These questions provide significant opportunities for future research.
ABSTRACT We study the effect of observational learning in a congested environment in which custom... more ABSTRACT We study the effect of observational learning in a congested environment in which customers choose among several alternatives ("locations"). While the locations' quality is known to informed customers, uninformed customers infer quality from the locations' congestion level (i.e., queue length at each location). We introduce two new rational joining strategies, that stand in contrast to the "join the shortest queue" strategies typically studied in the queuing literature. We characterize the conditions under which uninformed customers should "join the longest queue" (i.e., the majority) and when they should "join the shortest non-empty queue" (i.e., the minority), such as the single customer (the "contrarian") that seemingly chose against the wisdom of the majority. Congestion costs "mutes" the observational learning process, as uninformed customers may choose a short queue even when they expect higher quality from a location with a long queue, obfuscating what subsequent customers can learn from the queue length at different locations. While the presence of informed customers increases the overall welfare of the system, the average welfare of uninformed customers may actually decrease. We test our rational model in the laboratory, and find strong evidence for observational learning from congestion levels. However, relative to theoretical predictions, uninformed subjects in a low congestion cost environment tend to ignore the wisdom of minorities, and tend to follow more often the wisdom of majorities. This observation is consistent with the notion of "random choice": the possibility that minority queues may have been formed only by mistake, significantly diminishes their signalling value in favor of longer queues.
This paper studies pricing strategies of a monopolist when customers are strategic and infer the ... more This paper studies pricing strategies of a monopolist when customers are strategic and infer the product quality from historical sales and price paths. This behavior may be expected when selling a new, innovative product whose quality is unknown and customers have some, but, imperfect information about the product quality. The monopolist can sell a finite amount of inventory during a finite horizon. Its pricing policy controls the inventory (as in classical revenue management) as well as the customer learning. We derive the structure of the optimal pricing strategy and discuss the implications of strategic customer behavior.
We study coordination of a two-firm supply chain through repeated interaction: In each period of ... more We study coordination of a two-firm supply chain through repeated interaction: In each period of an infinite horizon, the upstream firm (the manufacturer) determines the wholesale price and the downstream firm (the retailer) subsequently sets the order quantity before the market demand is realized. Both firms discount future profits streams. No inventory is carried over between periods. In a single-period interaction, the wholesale price contract cannot achieve supply chain efficiency (or coordination) (Lariviere and Porteus, Manufacturing & Service Operations Management 3(4), 2001). With repeated interaction, we show that supply chain efficiency can be achieved with the wholesale price contract if the supply chain members have a sufficiently high discount factor. At the minimum possible discount factor under which coordination is possible, we show that the manufacturer decreases the wholesale price, in return for a larger order quantity from the retailer. We show that information about a parameter of the demand distribution, available to both players in the beginning of each period, may decrease the retailer's expected profit in a coordinated supply chain, or constrain supply chain coordination.
We study a single queue joining equilibrium when there is uncertainty in the consumers' minds abo... more We study a single queue joining equilibrium when there is uncertainty in the consumers' minds about the service rate and value. Without such uncertainty, the joining equilibria are characterized by means of a single threshold queue length above which consumers do not join . We show that in the presence of such uncertainty, the equilibrium joining strategy is not fully characterized by a single threshold. A "sputtering equilibrium" might exist. In the sputtering equilibrium, the queue length generally remains within a threshold, but reaches another, strictly higher, threshold, depending on the outcome of the randomized decision of the consumer arriving at the lower threshold. We discuss when and why sputtering equilibria exist.
ABSTRACT In this paper, we study the impact of consumer-generated quality information (e.g., cons... more ABSTRACT In this paper, we study the impact of consumer-generated quality information (e.g., consumer reviews) on a firm's dynamic pricing strategy in presence of strategic consumers. Such information is useful, not only to the consumers that have not yet purchased the product, but also to the firm. The informativeness of the consumer-generated quality information depends, however, on the volume of consumers who share their opinions and, thus, depends on the initial sales volume. Hence, via its initial price, the firm not only influences its revenue but also controls the quality information flow over time. The firm may either enhance or dampen the quality information flow via increasing or decreasing initial sales. The corresponding pricing strategy to steer the quality information flow is not always intuitive. Compared to the case without consumer-generated quality information, the firm may reduce the initial sales and lower the initial price. Interestingly, the firm may get strictly worse off due to the consumer-generated quality information. Even when the firm benefits from consumer-generated quality information, it may prefer less accurate information. Finally, consumer surplus can also decrease due to the consumer-generated quality information, contrary to the conventional wisdom that word-of-mouth should help consumers.
ABSTRACT We study the impact of wait time on consumers' purchasing behavior when product ... more ABSTRACT We study the impact of wait time on consumers' purchasing behavior when product quality is unknown to some consumers (the 'uninformed consumers'), but known to others (the 'informed consumers'). In a capacitated environment, wait times act as a signal of quality for uninformed consumers because, due to informed consumers in the population, low (high) quality products tend to generate shorter (longer) wait times. Hence, longer wait times may increase uninformed consumers' perceived quality, and they may still purchase the product, even when the wait time is long. Similarly, short wait times decrease the consumers' perceived quality, and they may walk away despite the short wait - the 'empty restaurant syndrome'. This paper develops and tests a theory of observational learning that predicts these effects. We find that uninformed consumers' purchasing probability at short waits decreases in the presence of informed consumers. Furthermore, we find that relatively few informed consumers suffice to create this effect. Finally, we show that the purchasing frequency might even increase in the wait time.
ABSTRACT We study the informational role stock-outs may play when consumers have heterogeneous in... more ABSTRACT We study the informational role stock-outs may play when consumers have heterogeneous information about the quality of a firm’s product. Typically, in a newsvendor world, matching uncertain demand with inventory leads inevitably to stock-outs. When, in addition, consumers are heterogeneously informed about the quality of the firm’s product, stock-outs caused early in the season by savvy consumers may be an indication of high quality for the less savvy consumers later in the season. The firm can leverage their increased willingness to pay after a stock-out via increased prices. As a consequence, in the presence of quality uncertainty, a firm may want to manipulate inventory early in the season to create stock-outs in order to take advantage of increased willingness to pay later in the season. In our model, stock-outs can thus be caused either by the firm’s inventory manipulations, or by market uncertainty. We find conditions under which stock-outs are an indication of high quality. Our model provides an explanation for frequently reported stock-outs of consumer electronic products or toys, whose potential markets are characterized by significant market uncertainty, but, also, whose quality may not be fully known by all consumers in the market. Compared to the case in which consumers do not observe stock-out information, we find that the firm rationally underinvests in inventory, which causes backorder costs early in the season that are leveraged later in the season via increased sales revenues. Interestingly, we find that the difference in price after a stock-out versus after no stock-out, and the equilibrium stock-out probability, can either increase or decrease with more-savvy early-season consumers.
ABSTRACT We consider the informational role of a queue when a firm can adjust its price to signal... more ABSTRACT We consider the informational role of a queue when a firm can adjust its price to signal its quality to uninformed consumers. When the proportion of informed consumers is relatively high, increasing the price of a high-quality good is a superior signaling strategy. In this case, high- and low-quality firms choose different prices, so the queue has no role in communicating information about quality. Such separation is costly for a high-quality firm if, to prevent imitation by the low-quality firm, it has to raise its price beyond a monopoly price. When the proportion of informed consumers is low, there are also equilibria in which high- and low-quality firms pool on a low price. We exhibit equilibria in which, in the limit as waiting costs vanish, the queue almost perfectly reveals the quality. Here, short queues are associated with the low-quality firm and long queues with the high-quality one. We show that the high-quality firm earns a higher profit in the pooling equilibrium with congestion as compared to the case of costly separation. This explains why some producers prefer to signal quality via the queue length rather than by charging a high price. We demonstrate numerically that our findings are robust to positive waiting costs.
ABSTRACT Taking advantage of low foreign tax rates using transfer pricing and taking advantage of... more ABSTRACT Taking advantage of low foreign tax rates using transfer pricing and taking advantage of low production costs using offshoring are two strategies multinational firms (MNFs) use to increase their profits. We identify an important trade-off that MNFs face in setting their transfer prices: the conflict between (i) the incentive role and (ii) the tax role played by the transfer price. For MNFs, we characterize transfer-pricing strategies that motivate divisional management to (i) make good sourcing decisions and (ii) take advantage of favorable tax rates. It is clear that using a dual transfer-pricing system, where one transfer price determines tax liability and the other transfer price determines management compensation will always achieve the first-best solution, but such an approach carries the burden of administrative and possibly punitive costs. In addition to finding the profit-maximizing sourcing and transfer-pricing policies for both single and dual transfer-pricing systems, we quantify the absolute and relative maximum inefficiency in terms of the after-tax MNF's profit change from using a single transfer-pricing system. Using numerical experiments, we show that the highest relative loss is attained when the average outsourcing and offshoring costs, as well as the tax differential, are high: when the outsourcing cost follows a asymmetric distribution and the average outsourcing cost is approximately equal to the offshoring cost. We also extend our results to two practical variations of MNF structures: an MNF that faces operational constraints on its offshoring capacity and an MNF that uses compensation contracts linked to after-tax firm-wide profits. Insights from our analysis should help MNFs' managers identify when to use single and dual transfer-pricing systems.
We study the determinants of dealer effort and manufacturers' incentive choice in an emerging mar... more We study the determinants of dealer effort and manufacturers' incentive choice in an emerging market and examine how the choice of manufacturer incentive and other market/demographic factors in the emerging market affect dealers' effort level and the profit of both-side channel members. Using data collected on power-tool industry from a leading international brand in Indian market, we provide evidence that …. Our analysis suggests that ….
Many products considered for remanufacturing are durable that exhibit a well-pronounced prod- uct... more Many products considered for remanufacturing are durable that exhibit a well-pronounced prod- uct life cycle - they diffuse gradually through the market. The remanufactured product, which is a cheaper substitute for the new product, is often put on the market during the life cycle of the new product and affects its sales dynamics. In this paper, we study the integrated
Taking advantage of lower foreign tax rates using transfer pricing and taking advantage of lower ... more Taking advantage of lower foreign tax rates using transfer pricing and taking advantage of lower production costs using offshoring are two strategies that global companies use to increase their profitability. Evidence suggests that firms employ these strategies independently. We study how global firms can jointly leverage tax and cost differences through coordinated transfer pricing and offshoring. We derive a trade-off curve between tax and cost differences that can be used to design sourcing and transfer pricing strategies jointly. However, in a global firm the implementation of such jointly optimal strategies is often hindered by the following incentive problem. The headquarters is more concerned about the consolidated after tax profits than the local divisions. Local divisions, on the other hand, have a better view on the product cost structure and hence, have a better view on the appropriate sourcing strategies. Hence, we need to understand how different transfer price strategi...
We consider a strategic queuing game for services with a credence good character. These are servi... more We consider a strategic queuing game for services with a credence good character. These are services for which the customers cannot verify how much time is required to address their needs. Examples are taxicab rides, legal advice or repair services. Customers arrive according to a Poisson process. The service rate is exponential and can be changed between two bounds, at no cost, as a function of the number of customers in the system. The customer pays to the service provider a fixed fee and a billing fee that depends on the realized service time. By slowing down the service rate, the service provider can make more billing fee revenues. The customer obtains some utility from the service, incurs dis-utility from waiting until the service is done and needs to pay the fixed fee and the time-based bill to the service provider. He decides whether to join the queue or not, after partially observing the queue length upon arrival at the service provider (whether the service provider is idlin...
... We refer to such a supply chain as a 'closed-loop supply chain,' opposed to... more ... We refer to such a supply chain as a 'closed-loop supply chain,' opposed to an 'open-loop supplychain,' in which there is no flow back from the customer. Reverse logistics is the group of activities ... chains.” In: Quantitative Models for Closed Loop Supply Chain Management. Eds. ...
Operations of publicly traded firms differ from privately owned firms because public firms' manag... more Operations of publicly traded firms differ from privately owned firms because public firms' managers make decisions based on their own interests. In this paper, we study how stock market pressure may influence a manager's inventory and operational management. Our model is a straightforward extension of a twoperiod inventory management problem with correlated demand. The manager's compensation is partially based on the firm's stock price which is influenced by the reported sales revenues. With better information about the "real" demand, the manager may manipulate the stock price by shipping more than the real demand to downstream customers and claim higher than real sales revenues using a well known form of real earnings management called "channel stuffing" or "sales padding." As it does not correspond to real demand, the padded demand will return later to the firm after additional costs are incurred. Hence, channel stuffing destroys the firm's value. Based on a game between the manager and the stock market, we identify three factors that determine the manager's incentive to use channel stuffing: the marginal incentive, the boundary effect and the carryover effect. The marginal incentive is independent of the inventory problem.
We explore customer choice behavior when they face a choice between service providers of unknown ... more We explore customer choice behavior when they face a choice between service providers of unknown service value. Customers arrive according to a Poisson process to the market. Service times are exponentially distributed with the same rate at each service provider. Both the service providers are capacitated (finite buffers), and the customers incur waiting costs when waiting for service. Customers observe decisions made by other customers in the form of queue lengths before making their choice. If more customers choose the same service, longer queues will form at the service. Therefore, the arriving customers infer service value is better at the service with the longer queue and would prefer to join the longer queue. But customers also have to suffer additional waiting costs in the longer queue before consuming the service. Furthermore, they might not even get the service at longer queue sometimes because the waiting space is full. We characterize the equilibrium queue-joining behavio...
We study an extension of a two-period inventory management problem with positively correlated dem... more We study an extension of a two-period inventory management problem with positively correlated demands in which the manager's compensation is partially based on an external, market-based assessment of the firm's value. As typically the "real" demand is only observed internally in the firm, the manager may ship more than the real demand to downstream customers and report higher than real sales revenues to influence the external firm valuation, which is known as "channel stuffing." As it is costly and does not reflect the real demand, channel stuffing destroys the firm's value. We identify three factors that drive the manager's incentives for channel stuffing: the marginal effect, the boundary effect and the carryover effect. The marginal effect, analogous to those earnings management incentives revealed in the literature (e.g., Stein, 1989), is independent of the inventory problem, while the boundary and carryover effects arise from the nature of th...
Many companies ship parts and materials from a multitude of suppliers scattered over a large area... more Many companies ship parts and materials from a multitude of suppliers scattered over a large area. Because the number of supplier relationships may be large and complex, the procurement problem is often divided among parties that scarcely coordinate. As a result, opportunities exist to reduce total logistical costs by consolidating orders and sharing trucks. For the North-American division of the Bosch/Siemens Home Appliances Corporation, we study how to design and implement such coordination while maintaining flexibility with respect to market forces and changes in demand volumes. Our proposed solution combines the incoming freight from different suppliers in what we call 'flex-runs', to better utilize truck space. The result is an expected transportation cost reduction of up to 25% with an overall increase in robustness with respect to volume fluctuations.
International Journal of Production Research, 2015
ABSTRACT As a fast growing specialty, medical telephone triage lines (nurse lines) play an import... more ABSTRACT As a fast growing specialty, medical telephone triage lines (nurse lines) play an important role in providing advice and recommendations to help ensure that medical care is delivered at the appropriate level. In this paper, we discuss the operations of these nurse lines, based on studies in the literature and interviews with nurse line researchers and practitioners. This leads us to identify issues relevant for the design and management of such lines, challenges that operations research (OR)/operations management (OM) can help address. We demonstrate that a classical call center modelling approach, focusing exclusively on congestion, will be insufficient in addressing these challenges. Thus, we motivate research on an integrated framework in which both congestion and decision-making accuracy are coupled. We summarise the limited extant research in OR/OM that is applicable to the unique challenges posed by nurse lines, highlighting these models’ contributions, as well as the questions they leave unanswered. These questions provide significant opportunities for future research.
ABSTRACT We study the effect of observational learning in a congested environment in which custom... more ABSTRACT We study the effect of observational learning in a congested environment in which customers choose among several alternatives ("locations"). While the locations' quality is known to informed customers, uninformed customers infer quality from the locations' congestion level (i.e., queue length at each location). We introduce two new rational joining strategies, that stand in contrast to the "join the shortest queue" strategies typically studied in the queuing literature. We characterize the conditions under which uninformed customers should "join the longest queue" (i.e., the majority) and when they should "join the shortest non-empty queue" (i.e., the minority), such as the single customer (the "contrarian") that seemingly chose against the wisdom of the majority. Congestion costs "mutes" the observational learning process, as uninformed customers may choose a short queue even when they expect higher quality from a location with a long queue, obfuscating what subsequent customers can learn from the queue length at different locations. While the presence of informed customers increases the overall welfare of the system, the average welfare of uninformed customers may actually decrease. We test our rational model in the laboratory, and find strong evidence for observational learning from congestion levels. However, relative to theoretical predictions, uninformed subjects in a low congestion cost environment tend to ignore the wisdom of minorities, and tend to follow more often the wisdom of majorities. This observation is consistent with the notion of "random choice": the possibility that minority queues may have been formed only by mistake, significantly diminishes their signalling value in favor of longer queues.
This paper studies pricing strategies of a monopolist when customers are strategic and infer the ... more This paper studies pricing strategies of a monopolist when customers are strategic and infer the product quality from historical sales and price paths. This behavior may be expected when selling a new, innovative product whose quality is unknown and customers have some, but, imperfect information about the product quality. The monopolist can sell a finite amount of inventory during a finite horizon. Its pricing policy controls the inventory (as in classical revenue management) as well as the customer learning. We derive the structure of the optimal pricing strategy and discuss the implications of strategic customer behavior.
We study coordination of a two-firm supply chain through repeated interaction: In each period of ... more We study coordination of a two-firm supply chain through repeated interaction: In each period of an infinite horizon, the upstream firm (the manufacturer) determines the wholesale price and the downstream firm (the retailer) subsequently sets the order quantity before the market demand is realized. Both firms discount future profits streams. No inventory is carried over between periods. In a single-period interaction, the wholesale price contract cannot achieve supply chain efficiency (or coordination) (Lariviere and Porteus, Manufacturing & Service Operations Management 3(4), 2001). With repeated interaction, we show that supply chain efficiency can be achieved with the wholesale price contract if the supply chain members have a sufficiently high discount factor. At the minimum possible discount factor under which coordination is possible, we show that the manufacturer decreases the wholesale price, in return for a larger order quantity from the retailer. We show that information about a parameter of the demand distribution, available to both players in the beginning of each period, may decrease the retailer's expected profit in a coordinated supply chain, or constrain supply chain coordination.
We study a single queue joining equilibrium when there is uncertainty in the consumers' minds abo... more We study a single queue joining equilibrium when there is uncertainty in the consumers' minds about the service rate and value. Without such uncertainty, the joining equilibria are characterized by means of a single threshold queue length above which consumers do not join . We show that in the presence of such uncertainty, the equilibrium joining strategy is not fully characterized by a single threshold. A "sputtering equilibrium" might exist. In the sputtering equilibrium, the queue length generally remains within a threshold, but reaches another, strictly higher, threshold, depending on the outcome of the randomized decision of the consumer arriving at the lower threshold. We discuss when and why sputtering equilibria exist.
ABSTRACT In this paper, we study the impact of consumer-generated quality information (e.g., cons... more ABSTRACT In this paper, we study the impact of consumer-generated quality information (e.g., consumer reviews) on a firm's dynamic pricing strategy in presence of strategic consumers. Such information is useful, not only to the consumers that have not yet purchased the product, but also to the firm. The informativeness of the consumer-generated quality information depends, however, on the volume of consumers who share their opinions and, thus, depends on the initial sales volume. Hence, via its initial price, the firm not only influences its revenue but also controls the quality information flow over time. The firm may either enhance or dampen the quality information flow via increasing or decreasing initial sales. The corresponding pricing strategy to steer the quality information flow is not always intuitive. Compared to the case without consumer-generated quality information, the firm may reduce the initial sales and lower the initial price. Interestingly, the firm may get strictly worse off due to the consumer-generated quality information. Even when the firm benefits from consumer-generated quality information, it may prefer less accurate information. Finally, consumer surplus can also decrease due to the consumer-generated quality information, contrary to the conventional wisdom that word-of-mouth should help consumers.
ABSTRACT We study the impact of wait time on consumers' purchasing behavior when product ... more ABSTRACT We study the impact of wait time on consumers' purchasing behavior when product quality is unknown to some consumers (the 'uninformed consumers'), but known to others (the 'informed consumers'). In a capacitated environment, wait times act as a signal of quality for uninformed consumers because, due to informed consumers in the population, low (high) quality products tend to generate shorter (longer) wait times. Hence, longer wait times may increase uninformed consumers' perceived quality, and they may still purchase the product, even when the wait time is long. Similarly, short wait times decrease the consumers' perceived quality, and they may walk away despite the short wait - the 'empty restaurant syndrome'. This paper develops and tests a theory of observational learning that predicts these effects. We find that uninformed consumers' purchasing probability at short waits decreases in the presence of informed consumers. Furthermore, we find that relatively few informed consumers suffice to create this effect. Finally, we show that the purchasing frequency might even increase in the wait time.
ABSTRACT We study the informational role stock-outs may play when consumers have heterogeneous in... more ABSTRACT We study the informational role stock-outs may play when consumers have heterogeneous information about the quality of a firm’s product. Typically, in a newsvendor world, matching uncertain demand with inventory leads inevitably to stock-outs. When, in addition, consumers are heterogeneously informed about the quality of the firm’s product, stock-outs caused early in the season by savvy consumers may be an indication of high quality for the less savvy consumers later in the season. The firm can leverage their increased willingness to pay after a stock-out via increased prices. As a consequence, in the presence of quality uncertainty, a firm may want to manipulate inventory early in the season to create stock-outs in order to take advantage of increased willingness to pay later in the season. In our model, stock-outs can thus be caused either by the firm’s inventory manipulations, or by market uncertainty. We find conditions under which stock-outs are an indication of high quality. Our model provides an explanation for frequently reported stock-outs of consumer electronic products or toys, whose potential markets are characterized by significant market uncertainty, but, also, whose quality may not be fully known by all consumers in the market. Compared to the case in which consumers do not observe stock-out information, we find that the firm rationally underinvests in inventory, which causes backorder costs early in the season that are leveraged later in the season via increased sales revenues. Interestingly, we find that the difference in price after a stock-out versus after no stock-out, and the equilibrium stock-out probability, can either increase or decrease with more-savvy early-season consumers.
ABSTRACT We consider the informational role of a queue when a firm can adjust its price to signal... more ABSTRACT We consider the informational role of a queue when a firm can adjust its price to signal its quality to uninformed consumers. When the proportion of informed consumers is relatively high, increasing the price of a high-quality good is a superior signaling strategy. In this case, high- and low-quality firms choose different prices, so the queue has no role in communicating information about quality. Such separation is costly for a high-quality firm if, to prevent imitation by the low-quality firm, it has to raise its price beyond a monopoly price. When the proportion of informed consumers is low, there are also equilibria in which high- and low-quality firms pool on a low price. We exhibit equilibria in which, in the limit as waiting costs vanish, the queue almost perfectly reveals the quality. Here, short queues are associated with the low-quality firm and long queues with the high-quality one. We show that the high-quality firm earns a higher profit in the pooling equilibrium with congestion as compared to the case of costly separation. This explains why some producers prefer to signal quality via the queue length rather than by charging a high price. We demonstrate numerically that our findings are robust to positive waiting costs.
ABSTRACT Taking advantage of low foreign tax rates using transfer pricing and taking advantage of... more ABSTRACT Taking advantage of low foreign tax rates using transfer pricing and taking advantage of low production costs using offshoring are two strategies multinational firms (MNFs) use to increase their profits. We identify an important trade-off that MNFs face in setting their transfer prices: the conflict between (i) the incentive role and (ii) the tax role played by the transfer price. For MNFs, we characterize transfer-pricing strategies that motivate divisional management to (i) make good sourcing decisions and (ii) take advantage of favorable tax rates. It is clear that using a dual transfer-pricing system, where one transfer price determines tax liability and the other transfer price determines management compensation will always achieve the first-best solution, but such an approach carries the burden of administrative and possibly punitive costs. In addition to finding the profit-maximizing sourcing and transfer-pricing policies for both single and dual transfer-pricing systems, we quantify the absolute and relative maximum inefficiency in terms of the after-tax MNF's profit change from using a single transfer-pricing system. Using numerical experiments, we show that the highest relative loss is attained when the average outsourcing and offshoring costs, as well as the tax differential, are high: when the outsourcing cost follows a asymmetric distribution and the average outsourcing cost is approximately equal to the offshoring cost. We also extend our results to two practical variations of MNF structures: an MNF that faces operational constraints on its offshoring capacity and an MNF that uses compensation contracts linked to after-tax firm-wide profits. Insights from our analysis should help MNFs' managers identify when to use single and dual transfer-pricing systems.
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Papers by Laurens Debo