Optimal Decisions of a Supply Chain with Two Risk-Averse and Competing Retailers under Random Demand

This paper investigates the optimal decisions in a decentralized supply chain consisting of one manufacturer and two competing retailers who face price-sensitive and stochastic demand. The retailers are risk averse with conditional value at risk (CVaR) as their risk measure, and the manufacturer is a risk-neutral agent. We construct manufacturer-Stackelberg games with retailers, who engage in horizontal price competition. For the multiplicative demand model and expected demand as an exponential function of both prices, we show that there exists the optimal pricing-ordering joint decision uniquely. We then explore the influence of the price sensitivity, risk aversion, and retail competition on optimal decisions and channel efficiency. The results show that retail competition contributes to manufacturer and improves channel efficiency of the decentralized supply chain. When the retailers are more risk averse, the channel efficiency becomes much lower. However, the level of retailers’ risk aversion has no significant impact on the manufacturer’s optimal wholesale price and retailer’s optimal selling price

Behavioral Implications of Demand Perception in Inventory Management

The newsvendor problem is one of the rudimentary problems of inventory management with significant practical consequences, thus receiving considerable attention in the behavioral operational research literature. In this chapter, we focus on how decision makers perceive demand uncertainty in the newsvendor setting and discuss how such perception patterns influence commonly observed phenomena in order decisions, such as the pull-to-center effect. Drawing from behavioral biases such as over precision, we propose that decision makers tend to perceive demand to be smaller than it actually is in high margin contexts, and this effect becomes more pronounced with increases in demand size. The opposite pattern is observed in low margin settings; decision makers perceive demand to be larger than the true demand, and this tendency is stronger at lower mean demand levels. Concurrently, decision makers tend to perceive demand to be less variable than it actually is, and this tendency propagates as the variability of demand increases in low margin contexts and decreases in high margin contexts. These perceptions, in turn, lead to more skewed decisions at both ends of the demand spectrum. We discuss how decision makers can be made aware of these biases and how decision processes can be re-designed to convert these unconscious competencies into capabilities to improve decision making

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

Supplier-Buyer Negotiation Games: Equilibrium Conditions and Supply Chain Efficiency

In a decentralized supply chain, supplier–buyer negotiations have a dynamic aspect that requires both players to consider the impact of their decisions on future decisions made by their counterpart. The interaction generally couples strongly the price decision of the supplier and the quantity decision of the buyer. We propose a basic model for a repeated supplier–buyer interaction, during several rounds. In each round, the supplier first quotes a price, and the buyer places an order at that price. We find conditions for existence and uniqueness of a well-behaved subgame-perfect equilibrium in the dynamic game. When costs are stationary and there are no holding costs, we identify some demand distributions for which these conditions are met, examine the efficiency of the equilibrium, and show that, as the number of rounds increases, the profits of the supply chain increase towards the supply chain optimum. In contrast, when costs vary over time or holding costs are present, the benefit from multi-period interactions is reduced and after a finite number of time periods, supply chain profits stay constant even when the number of rounds increases

The impact of prices on boundedly rational decision makers in supply chains

This PhD thesis was motivated by the simple observation that the objectives of distinct supply chain managers are often conflicting. This problem is usually addressed via supply chain contracts that are designed to align the incentives of the different supply chain partners to the overall benefit of the entire supply chain, when seen as a whole. In this way, the long-term prosperity and viability of all the firms that participate in the supply chain can be ensured. In order to study the efficiency of different supply chain contracts in attaining the theoretical optimum performance, there exist a number of standard normative models that predict the decisions of perfectly rational decision makers. But supply chain partners might in reality not make the perfectly rational decisions that these theoretical models predict. This may be because they may lack the required information, or experience cognitive limitations and individual preferences or have only a finite amount of time available. For this reason, they might have to settle at satisficing choices. The result of these ‘boundedly rational’ decisions is a real world of different than expected interactions. Since in this world the standard normative models retain limited predictive power, this PhD thesis aims to explore the true efficiency of the simplest supply chain contract that can exist, namely, the wholesale price contract. In addition, this PhD thesis provides some useful recommendations that aim to help supply chain managers make price and order quantity decisions that would be better aligned with the interests of the overall supply chain. To this end, this study applies an original approach that supplements experiments with human subjects with Agent Based Simulation experiments. In greater detail, informal pilot sessions with volunteers were first conducted, during which knowledge of the underlying decision making processes was elicited. Appropriate Agent Based Simulation models were subsequently built based on this understanding. Later on human subjects were asked to interact with specially designed versions of these Agent Based Simulation models in the laboratory, so that their consecutive decisions over time could be recorded. Statistical models were then fitted to these data sets of decisions. The last stage of this approach was to simulate in the corresponding Agent Based Simulation models all possible combinations of decision models, so that statically accurate conclusions could be inferred. This approach has been replicated for both the simple newsvendor setting and the beer distribution game. The results that are obtained indicate that the overall efficiency of the wholesale price contract differs significantly from the theoretical prediction of the corresponding standard normative models. It varies greatly and depends largely on the interplay between the pricing and ordering strategies that the interacting supply chain partners adopt. In view of this, real world echelon managers are advised to use prices as an effective mechanism to control demand and, also, keep their total supply chain profits in mind when making their respective decisions.EThOS - Electronic Theses Online ServiceUniversity of WarwickWarwick Business SchoolEngineering and Physical Sciences Research Council (EPSRC)Operations Research Society (England)GBUnited Kingdo

The Vendor in a Retail Setting: A Survey

We consider the problem of managing nonperishable inventory as a vendor in a grocer setting. To manage inventory effectively, we must meet the demand of our customers as closely as we can. Too much inventory results in holding costs and ties up a large amount of capital and too little inventory results in lost sales or substitution. It is typical in a retail setting for the vendor to have access to past ordering data, but this data is only representative of the demand when we have sufficient inventory. Otherwise, the demand exceeds the inventory on hand and we lose, in addition to the sale, the observation of the true demand. However, we get ahead of ourselves since the ability for the vendor to even know if there is an out-of-stock situation is questionable. This can be addressed through cooperation with the store and access to point of sale systems. The setting is further complicated by such things as the presence of multiple products, a backroom, and positive leadtimes. We conduct a survey on these topics as well as others pertaining to a vendortype situation such as periodic review, service level constraints, fixed order costs, and the joint replenishment problem

The effects of subsidies on increasing consumption through for-profit and not-for-profit newsvendors

Subsidy programs are widely offered in both developing and developed countries to encourage consumption of products that generate positive social, health, and environmental externalities. We study the effect of subsidies on product consumption under uncertain market demand. To reach a target consumer population, the program sponsor may subsidize a for-profit or a not-for-profit firm on each unit of the product purchased by the firm or on each unit of the sale generated by the firm. We show that subsidy programs provide stronger incentives to a not-for-profit firm than to its for-profit counterpart in inducing a large consumption whenever the sponsor is having a very limited budget or a very generous budget. When subsidizing a not-for-profit firm, the sponsor should always choose the purchase subsidy over the sales subsidy because the former can induce a larger consumption than the latter with the same subsidy spending. However, this is not always true when the subsidy program is administered through a for-profit firm, unless the firm is a price taker in the market or the sponsor has a limited budget. Our analysis leads to new theoretical development of price-setting newsvendor problem for both the for-profit and not-for-profit operations under subsidy.National Natural Science Foundation of China. Grant Numbers: 71471107, 7143100

Multiperiod Inventory Management with Budget Cycles: Rational and Behavioral Decision-Making

We examine inventory decisions in a multiperiod newsvendor model. In particular, we analyze the impact of budget cycles in a behavioral setting. We derive optimal rational decisions and characterize the behavioral decision-making process using a short-sightedness factor. We test the aforementioned effect in a laboratory environment. We find that subjects reduce order-up-to levels significantly at the end of the current budget cycle, which results in a cyclic pattern during the budget cycle. This indicates that the subjects are short-sighted with respect to future budget cycles. To control for inventory that is carried over from one period to the next, we introduce a starting-inventory factor and find that order-up-to levels increase in the starting inventory

Transition to Electric Vehicles In the California Automobile Industry

This dissertation presents a comprehensive study on the market adoption of electric vehicle and policy impact of the Zero Emission Vehicle (ZEV) mandate in the California automotive market. This research is primarily consisting of three parts. The author first built a technology innovation pricing model based on multi-nomial logit modelling method. This studies the dynamics among customer preferences, market acceptance and policy impact on vehicle pricing in the California automotive market. Results show that the ZEV mandate could profoundly enhance the market adoption of electric vehicles. There is a threshold on the magnitude of policy intervention. If the number of credits per vehicle is less than the threshold, increasing intervention promotes the EV market penetration; however, beyond the threshold, policy primarily benefits automakers. In the second step, the author presents a decision model for electric vehicle attributes. This research first characterizes the market adoption rate of electric vehicle models under government subsidy and derives optimal vehicle attributes with respect to consumers\u27 preferences and product-based subsidy. The proposed model was then applied to the California\u27s automotive market. Our results also suggest that industry leaders and followers may choose different product strategy and market segments due to different battery manufacturing costs. In the last part, the author constructed a series of scenarios for the transition to battery electric cars and used the Market Acceptance of Advanced Automotive Technologies model to analyze the price competition in the California electric vehicle market. Considering the ZEV mandate already in place, this part investigates the role of this regulation in influencing the pricing decisions of different electric vehicle models and enhancing the overall market adoption rate. It was found that the 200-mile range electric vehicle had remarkable unilateral influence on the pricing of the 100-mile range electric vehicle. It suggests that the 200-mile range electric vehicle will become the core driving force in electric vehicle diffusion in the California electric vehicle market. The ZEV mandate remarkably reduced the prices of both models and increased corresponding annual demand. However, this policy showed considerable influence of changing the structure of the California electric vehicle market