Supply chain contracting with competing regretful retailers

We study a two-tier supply chain with demand uncertainty where retailers experience regret from ex-post inventory error. With a monopolist retailer, we find that individual rationality can lead to supply chain coordination and creates non-trivial differences between regret and other reference points previously shown to be mathematically equivalent. Under competition, inventory regret can lead to either a separating or a pooling equilibrium despite the heterogeneity in their disutility from regret. The potential for a separating or pooling equilibria also differs substantially from the extant literature with implications for the wholesale price contracts and how competition dynamics impact industry service levels

Advance selling and service cancelation when consumers are overconfident

Purpose: This paper aims to study the joint decision making of advance selling and service cancelation for service provides with limited capacity when consumers are overconfident. Design/methodology/approach: For the case in which consumers encounter uncertainties about product valuation and consumption states in the advance period and are overconfident about the probability of a good state, we study how the service provider chooses the optimal sales strategy among the non-advance selling strategy, the advance selling and disallowing cancelation strategy, and the advance selling and allowing cancelation strategy. We also discuss how overconfidence influences the service provider’s decision making. Findings: The results show that when service capacity is sufficient, the service provider should adopt advance selling and disallow cancelation; when service capacity is insufficient, the service provider should still implement advance selling but allow cancelation; and when service capacity is extremely insufficient, the service provider should offer spot sales. Moreover, overconfidence weakens the necessity to allow cancelation under sufficient service capacity and enhances it under insufficient service capacity but is always advantageous to advance selling. Practical implications: The obtained results provide managerial insights for service providers to make advance selling decisions. Originality/value: This paper is among the first to explore the effect of consumers’ overconfidence on the joint decision of advance selling and service cancelation under capacity constraints

The Role of Consumer Behaviour in Service Operations Management

In this thesis, I study the impact of consumer behaviour on service providers’ operations. In the first study, I consider service systems where customers do not know the distribution of uncertain service quality and cannot estimate it fully rationally. Instead, they form their beliefs by taking the average of several anecdotes, the size of which measures their level of bounded rationality. I characterise the customers’ joining behaviour and the service provider’s pricing, quality control, and information disclosure decisions. Bounded rationality induces customers to form different estimates of the service quality and leads the service provider to use pricing as a market segmentation tool, which is radically different from the full rationality setting. When the service provider also has control over quality, I find that it may reduce both quality and price as customers gather more anecdotes. In addition, a high-quality service provider may not disclose quality information if the sample size is small. In the second study, I analyse the performance of opaque selling in countering the negative revenue impact from consumers’ strategic waiting behaviour in vertically differentiated markets. The advantage of opaque selling is to increase the firm’s regular price, whereas the disadvantage lies in the inflexibility of segmenting different types of consumers. Both the advantage and the disadvantage are radically different from their counterparts in horizontally differentiated markets, and this contrast generates opposite policy recommendations across the two settings. In the third study, I investigate an online store’s product return policy when competing with a physical store, in which consumers can try the product before purchase. I find that the online store should offer product return only if it is socially efficient. Moreover, it should allocate product return cost between the online store and the consumers to minimise the total return cost

Essays on Marketing Strategy

In this dissertation, I apply game-theoretical methods in the context of marketing research and investigate the effects of stylized facts in behavioral economics. Chapter 1 studies the effects of managerial optimism on firms’ performance. Research has shown that many managers and entrepreneurs tend to be optimistic and are inclined to believe that negative shocks happen to them less frequently than to others. However, there is also evidence suggesting that such optimism is often inaccurate in reality and managerial optimism can lead to the failure of a company. We develop a game-theoretic model to investigate the impact of managerial optimism on firms’ performance in a competitive market. Our analysis shows that a manager’s optimism about demand can increase the firm’s profit. Moreover, only one firm having managerial optimism can be win-win for both firms in a duopoly, because it can increase the level of product quality differentiation between the firms, alleviating price competition. However, if both firms have optimistic managers, the benefit of increased differentiation disappears, and firms are weakly worse off, compared with the case of both firms having realistic managers. Our research suggests that a firm should hire a realistic manager when managerial optimism is already pervasive in a competitive market. Chapter 2 studies the effects of different supply chains on firms’ profitability. In many supply chains, the downstream retailer designs product quality and decides retail price, but outsources the production to an upstream manufacturer. This practice is referred to as “contract manufacturing” (CM). Sometimes, in addition to production outsourcing, the retailer also outsources the design process to the manufacturer. This is referred to as “original design manufacturing” (ODM). This chapter compares these two different outsourcing practices and develops a game-theoretical model to investigate the effects of quality design outsourcing on quality level, price, and the profits of both the retailer and the manufacturer in a market with demand uncertainty. Our analysis reveals that in ODM, the product has lower quality level, lower wholesale price, and lower retail price than in CM. The retailer is better off with ODM when demand uncertainty is low, and better off with CM when demand uncertainty is high. Moreover, when demand uncertainty is high, the manufacturer’s profit may increase with demand uncertainty. In Chapter 3, using data from a Chinese textile manufacturer that supplies a major U.S. retailer, we estimate a logit model and demonstrate that, consistent with our prediction, the retailer is more likely to choose ODM and outsource quality design under low high demand uncertainty

Business Model Innovation, Social Interactions, and Behavioral Decision Making

University of Minnesota Ph.D. dissertation. August 2019. Major: Industrial and Systems Engineering. Advisors: Guangwen Kong, Saif Benjaafar. 1 computer file (PDF); xiii, 181 pages.This thesis consists of three parts. All chapters are centered around the behavioral decision making and business model innovation. In the first essay, we study a supply chain with a supplier selling products to a retailer who is boundedly rational. Under this setting, we study the impacts of the retailer's bounded rationality on the supplier's choice of contract and the supply chain efficiency. We develop a behavioral model that incorporates the human retailers bounded rationality in a supply chain setting. We then conduct a series of laboratory experiments to test whether the model's predictions are still salient even when the supplier is not necessarily rational. In contrast to a supply chain with a fully rational retailer, where a wholesale price contract usually cannot perform better than more complicated nonlinear contracts, we find that when the retailer is boundedly rational a wholesale price contract can dominate commonly used nonlinear contracts such as buy-back and revenue sharing contracts. We characterize the conditions under which a wholesale price contract outperforms more sophisticated non-linear price contracts for the supplier. In both theoretical model and the experiments, we find that a wholesale price contract is more likely to be implemented by the supplier when the supply chain profit margin is low, the retailer is less rational, the demand variance is high, and the retailer's reservation value is high. The results can explain the prevalence of wholesale price contract in business practice when the rationality of retailers cannot always be guaranteed. We also find that the retailer's bounded rationality plays a more important role in determining supply profit than the supplier's bounded rationality. In the second essay, we consider a setting which involves a service provider who sells access to a service or a product to a unit mass of heterogenous consumers. Such s business model is gaining popularity in recent years. With this growth comes opportunities for peer-to-peer trading marketplaces to emerge. However, there is a debate on whether or not peer-to-peer trading of excess capacity is beneficial to service providers and consumers. The second essay in this thesis aims to shed light on this debate and identifies conditions under which the existence of such marketplaces can be a win-win situation for all parties. We develop a game-theoretic model in which consumers participate in a simultaneous coordination game. Consumers are strategic and take into account the opportunity of purchasing or selling extra capacity on the trading market. Our model captures the heterogeneity of consumers' demand and the service provider's ability to modify service plans in view of this trading among consumers. We compare equilibrium outcomes with and without trading and show that outcomes with regard to service provider profit, consumer surplus, and social welfare are crucially dependent on service cost and trading price. A service provider would benefit from trading as long as the trading price is not too low (a low trading price encourages more consumers to opt for the low plan) and the service cost is not too high (a high service cost makes increased consumption due to trading too costly). A trading price that is too low can decrease consumer surplus and social welfare. Hence, a social planner would be interested in inducing a moderate or high trading price. In settings where the service provider can modify prices, consumers are no longer guaranteed to benefit from trading. In this case, trading can hurt consumers if the trading price is either sufficiently high (resulting in consumers paying a higher price for the higher plan) or sufficiently low (resulting in less consumption because more consumers opt for the low plan). Our results provide guidance to service providers, consumers, and policy makers as to when peer-to-peer trading may or may not be beneficial. The results highlight the important interplay between trading price and cost of service in determining various outcomes. For policymakers, the results can be useful in pointing out when such trading improves outcomes for consumers or social welfare and to potential policy levers that could be deployed to affect outcomes. Finally, in the last essay, we study the interaction between information asymmetry and the reciprocity in a financial crowdfunding setting. Most of the crowdfunding platforms encourage entrepreneurs to tap into their social network and bring investors from their social networks to their crowdfunding campaigns. This is done with the intention of creating the early momentum which appears to be the key to running a crowdfunding campaign. However, the incentives and information of those investors who are attracted to crowdfunding campaign from the entrepreneur's social network could be different from other investors who do not have a social tie with the entrepreneur. On the other hand, the regular investors do not have a social tie with the entrepreneur and their sole investment motivation is financial. In the last essay of this thesis, we develop a signaling game to better understand the interaction between the reciprocity and the information flow in a financial crowdfunding setting. Our main result indicates that the reciprocity may create a situation in which the informed investor (those from the entrepreneur's social network) cannot signal their type via distorting her investment

The impact of judgment on statistical forecasts

The thesis will aim to empirically assess how judgment impacts a statistical forecast in a spare parts supply chain.The thesis will investigate what impact judgment has on forecast accuracy that is, does it improve the statistical forecast. If so, is there specific types of demand series, spare parts types or expertise which can affect the accuracy improvement. The results will be used to provide a matrix showing where judgment should or should not be applied to a statistical forecast with regards to accuracy improvement.The size and direction of the judgmental adjustment will be scrutinised to explore where any correlation can be found to accuracy improvement. The experiment will be for a 12 months longitudinal period using forecast experts who are working in a company and are forecasting the same spare parts on a day to day basis. The statistical forecast used will be the method that the company uses on a day to day basis. In order to benchmark the performance of the experts a senior academic will also be forecasting the spare parts involved over the same period in order to show another comparison but with a more considered, complex statistical forecast rather than the relatively simple average based statistical forecast the company used.Insights into further research, limitations of the experiment and a conclusion stating the impact to academic knowledge and possible practitioner usage will be discussed