Capital Budgeting in the Decentralized Firm

In this paper we analyze the capital budgeting problem of an organization which contains a central headquarters and K divisions. The headquarters serves as the planner-coordinator of the capital budgeting process and is the only member of the organization which has access to the external capital markets. The K divisions make decisions regarding the set of capital projects each wants to accept. The capital budgeting problem of this decentralized organization is solved and analyzed with the aid of an algorithm based on mathematical decomposition. It is shown that (i) the decomposition algorithm does indeed converge to an optimal corporate solution, (ii) under reasonable assumptions, the marginal rate of return on the last dollar spent is the same for each division and is equal to the corporate headquarters' "cost of capital," (iii) in some circumstances, the decomposition model will only select integral projects, and (iv) the optimal choice of projects for the firm is made independently by the divisions, each acting in its own self-interest. This last feature of the capital budgeting model suggests that the firm may be able to achieve the informational economies usually associated with a decentralized organization structure.

Strategic Pricing and Entry under Universal Service and Cross-Market Price Constraints

Recent changes in telecommunications markets raise the issue of how price restrictions across markets impact strategic entry and pricing decisions. The Telecommunications Act of 1996 opens all telecommunications markets to competition and contains a provision for universal service, requiring that advanced services be made available to rural customers at rates comparable to those for urban customers. We develop a simple multi-market model which features an oligopolistic urban market, entry auctions for rural service, and a price restriction across markets, and analyze strategic pricing and entry choices. We show how these price restrictions induce a firm operating in both markets to become a "softer" competitor, thus placing the firm at a strategic disadvantage relative to urban markets competitors. However, once we account for entry incentives and recognize that firms may bid strategically for rural markets, we find that the downstream strategic disadvantage becomes advantageous, leading to higher prices and profits in both markets. We also identify when these price restrictions put outside firms, even relatively inefficient ones, at a strategic advantage in entry auctions.

Strategic Pricing and Entry under Universal Service and Cross-Market Price Constraints

In this paper, we examine how cross-market price restrictions impact strategic entry and pricing decisions. A motivating example is the 1996 Act in the United States which opens telecommunications markets to competition and contains a provision for universal service, requiring that advanced services be made available to rural customers at rates comparable to those for urban customers. We develop a multi-market model which features an oligopolistic urban market, entry auctions for rural service, and a price restriction across markets. Price restrictions induce a firm operating in both markets to become a ‘softer’ competitor, thus placing the firm at a strategic disadvantage. Once we account for entry incentives and recognize that firms may bid strategically for rural markets, we find that the downstream strategic disadvantage becomes advantageous, leading to higher prices and profits in both markets. We also identify when these price restrictions put outside firms, even relatively inefficient ones, at a strategic advantage in entry auctions.entry auctions; pricing; Telecommunications; universal service

Recent Developments in Management Science in Banking

Banking has been a fertile area for management science applications, as is evident from the review provided in this paper. The relevant management science models are discussed in terms of the areas of bank management for which they were intended. Under dynamic balance sheet management (i.e., internal bank financial planning) we consider forecasting techniques, simulation models and optimization models. Other areas of banking included are bond portfolio management, bank operations, corporate services, bank marketing and management of the loan portfolio. The authors provide an evaluation of the applicability of management science models in practice, discuss the extent to which some have been implemented and consider the philosophy of using management science models in banking.finance, financial institutions: banks