Alliance Formation Among Perfectly Complementary Suppliers in a Price-Sensitive Assembly System

Independent parties that produce perfectly complementary components may form alliances (or coalitions or groups) to better coordinate their pricing decisions when they sell their products to downstream buyers. This paper studies how market demand conditions (i.e., the form of the demand function, demand uncertainty, and price-sensitive demand) drive coalition formation among complementary suppliers. In a deterministic demand model, we show that for an exponential or isoelastic demand function, suppliers always prefer selling in groups; for a linear-power demand function, suppliers may all choose to sell independently in equilibrium. These results are interpreted through the pass-through rate associated with the demand function. In an uncertain demand model, we show that, in general, the introduction of a multiplicative stochastic element in demand has an insignificant impact on stable coalitions and that an endogenous retail price (i.e., demand is price sensitive) increases suppliers' incentives to form alliances relative to the case with a fixed retail price. We also consider the impact of various other factors on stable outcomes in equilibrium, e.g., sequential decision making by coalitions of different sizes, the cost effect due to alliance formation (either cost savings or additional costs), and a system without an assembler.alliance formation, demand curvature, pass-through rate, assembly system

Strategic Capacity Planning Problems in Revenue‐Sharing Joint Ventures

Peer Reviewedhttps://deepblue.lib.umich.edu/bitstream/2027.42/154244/1/poms13128_am.pdfhttps://deepblue.lib.umich.edu/bitstream/2027.42/154244/2/poms13128.pd

Ambiguity aversion in buyer-seller relationships: A contingent-claims and social network explanation

Negotiations between buyers and sellers (or suppliers) of goods and services have become increasingly important due to the growing trend towards international purchasing, outsourcing and global supply networks together with the high uncertainty associated with them. This paper examines the effect of ambiguity aversion on price negotiations using multiple-priors-based real options with non-extreme outcomes. We study price negotiation between a buyer and seller in a dual contingent-claims setting (call option holding buyer vs. put option holding seller) to derive optimal agreement conditions under ambiguity with and without social network effects. We find that while higher ambiguity aversion raises the threshold for commitment for the seller, it has equivocal effects on the buyer's negotiation prospects in the absence of network control. Conversely when network position and relative bargaining power are accounted for, we find the buyer's implicit price (or negotiation threshold) decreases (or increases) unequivocally with increasing aversion to ambiguity. Extending extant real options research on price negotiation to the case of ambiguity, this set of results provides new insights into the role of ambiguity aversion and network structures in buyer-seller relationships, including how they influence the range of negotiation agreement between buyers and sellers. The results also help assist managers in formulating robust buying/selling strategies for bargaining under uncertainty. By knowing their network positions and gathering background information or inferring the other party's ambiguity tolerance beforehand, buyers and sellers can anticipate where the negotiation is heading in terms of price negotiation range and mutual agreement possibilities

Pricing Decentralization in Customized Pricing Systems and Network Models

In this thesis, we study the implications of multi-party pricing for both consumers and producers in different settings. Within most organizations, the final price of a product or service is usually the result of a chain of pricing decisions. This chain may consist of different departments of the same company as well as different companies in a specific industry. Understanding the implications of such chains on the final prices and on consumer and producer surplus is the key topic of this dissertation. In the first part of this thesis, we consider a network in which products consist of combinations of perishable resources. In this model, different revenue-maximizing "controllers" determine the resource prices and the price of the product is the sum of the prices of the constituent resources. For uncapacitated networks, we develop bounds on the "price of anarchy" -the loss from totally decentralized control versus centralized control- as the number of controllers increases. We present provably convergent algorithms for calculating Nash equilibrium prices for both the uncapacitated and capacitated cases and -using these algorithms- illustrate counterintuitive situations in which consumer surplus increases after decentralization. While we develop our model in the context of airline pricing, it is applicable to any service network such as freight transportation, pipelines, and toll roads as well as to the more general case of supply chain networks. In the rest of the dissertation, we focus on understanding and improving pricing decisions in the case when corporate headquarters set a list price for all products but local sales force is given discretion to adjust (or negotiate) prices for individual deals. This form of pricing is called list pricing with discretion (LPD) and it is commonly found in most business-to-business markets and in certain business-to-consumer settings, including consumer lending, insurance, and automobile sales. In the LPD setting, the question of how much (if any) pricing discretion should be granted to local sales force is crucial. In the second part of this thesis, we study this issue using two data sets - one from an online lender who sets all prices centrally and one from an indirect lender with local pricing discretion. We find strong evidence that the indirect sales force adjusts prices in a way that improves profitability. However, we also show that using a centralized, data-driven pricing optimization system has the potential of improving profitability further. In addition, using a control function approach, we show that the discretion applied by the local sales force introduces significant endogeneity into the indirect lender's pricing process. Ignoring this endogeneity can lead to severe underestimation of price sensitivity. These insights are valuable for any customized pricing market in which in-person interaction is part of the price-setting process. Finally, in the last part, we focus on the underlying negotiation process of the LPD setting and on the fact that not only buyers differ in their willingness-to-pay (WTP) but sellers also differ in the minimum prices (reservation prices) that they are willing to accept for the transaction. We develop a methodology based on the Expectation-Maximization (EM) algorithm to estimate both the WTP and the reservation price distributions given transactions data. The required data include information about both completed trades and failed trades, however price information is only available for completed trades (which is the most common situation in these markets). Using the same data from the auto lending industry, we show that our approach provides improved estimates of customer price-sensitivity over the approaches commonly used in practice. We also show how the WTP and reservation price estimates can be used to improve profits for the seller by optimally setting reservation prices on negotiations

Stability and Endogenous Formation of Inventory Transshipment Networks

This paper studies a cooperative game of inventory transshipment among multiple firms. In this game, firms first make their inventory decisions independently and then decide collectively how to transship excess inventories to satisfy unmet demands. In modeling transshipment, we use networks of firms as the primitive, which offer a richer representation of relationships among firms by taking the coalitions used in all previous studies as special cases. For any given cooperative network, we construct a dual price allocation under which the network is stable for any residual demands and supplies in the sense that no firms find it more profitable to form subnetworks. Under the allocation based on the marginal contribution of each firm to its network (called the MJW value), we show that various network structures such as complete, hub-spoke, and chain networks are stable only under certain conditions on residual amounts. Moreover, these conditions differ across network structures, implying that a network structure plays an important role in establishing the stability of a decentralized transshipment system. Finally, we consider the case when firms establish networks endogenously, and show that pairwise Nash stable networks underperform the corresponding networks in centralized systems. </jats:p

Essays on Complementary Products and Strategies

Complementary products contribute significantly to the growth and sustenance of primary products and platforms in many high technology product markets. Although different literatures have investigated issues related to complementary products, our understanding on this topic is limited. This dissertation aims to address some of the questions in the growing literature on complementary products. Following the literature review, the third chapter develops the conceptual underpinnings of product complementarity and examines commonly specified definitions to clarify the dimensions of product complementarity. The fourth chapter addresses the boundary question from the perspective of a primary product firm. The theoretical model identifies the antecedents of the internalization decision emphasizing the influence of type of product complementarity and key environmental contingences, viz., technological and market demand uncertainty. The fourth and fifth chapters of the thesis examine the role of type of complementarity in predicting the governance choices of 31 public businesses over a time frame of 26 years in the PC industry, a setting where complementary products have significantly influenced the competitive and technological landscape. The study findings reveal that type of complementarity along with environmental contingences influence a firm's choice of internalization, alliances or complementor make. Market demand uncertainty influences the choice of strategy towards complementary product for moderately increasing levels of uncertainty while technological uncertainty predicts the governance choices for both low and moderately increasing levels of uncertainty. In addition, in accordance with emerging literature in the Transaction Cost Economics logic (Leiblein & Miller, 2002; Jacobides, 2005) the findings highlight the role of firm capabilities. The dissertation attempts to contribute to the strategy literature by explicating the importance of nature of complementary products, so far not addressed in traditional TCE work.Ph.D., Business Administration -- Drexel University, 201