Speaker: Canan Ulu, Assistant Professor at the University of Texas at Austin
Title: Learning Consumer Tastes from Dynamic Assortments: A Nonparametric Bayesian Model
Abstract: We study dynamic assortment decisions of a firm learning about consumer tastes by observing sales of the assortments offered. Each period, the firm offers an assortment to maximize expected total profits over a finite horizon given its subjective beliefs on consumer tastes. The consumers choose a product that maximizes their own utility and the firm updates its beliefs on consumer tastes after having observed the sales of each product in the assortment. We model consumer tastes as locations on a Hotelling line and develop a nonparametric Bayesian model using Polya tree priors that makes no assumptions on the form of the consumer taste distribution. Our nonparametric learning model results in optimal profits that are robust to misspecification of the form of consumer taste distributions. We develop upper bounds on firm’s total profit and study performance of various heuristic policies with respect to these upper bounds.
Speaker: Gad Allon, Professor at Northwestern University
Title: “We Will be Right With You”: Managing Customers Expectations with Vague Promises and Cheap Talk
Abstract: Delay announcements informing customers about anticipated service delays are prevalent in service-oriented systems. How to use delay announcements to manage the service system in an efficient manner is a complex problem which depends on both the dynamics of the underlying queuing system and on the customer behavior. We examine this problem of information communication by considering a model in which both the firm and the customers act strategically: the firm in choosing its delay announcement while anticipating customer response, and the customers in interpreting these announcements and in making the decision about when to join the system and when to balk. We characterize the equilibrium language that emerges between the service provider and her customers. The analysis of the emerging equilibria provides new and interesting insights into customer-firm information sharing. We show that even though the information provided to customers is non-verifiable and non-credible, it improves the profits of the firm and the expected utility of the customers. Further, the information could be as simple as "High Congestion"/"Low Congestion" announcements, or could be as detailed as the true state of the system. We also show that firms may choose to shade some of the truth by using intentional vagueness to lure customers.
Speaker: Krishnan Anand, Associate Professor at the University of Utah
Title: Trembling into myopia: Honesty in the dynamic hold-up problem
Abstract: In the classical hold-up problem, investment in relation-specific assets by a firm leaves it vulnerable to ex post opportunistic behavior by its contracting partner (whether its supplier or its customer). The remedies proposed in the economics literature to mitigate the hold-up problem are often complex (e.g., sophisticated vertical contracts involving back-out clauses and remedial measures), and extreme (such as vertical integration). Several questions arise, that we attempt to address in this research. Given the propensity to hold-ups, why is vertical integration not more widespread, and why do so many bilateral relationships thrive? Furthermore, why do so many of these firms employ simple vertical contracts instead of the more sophisticated contracts proposed in the literature, and why do firms honor their ex ante contractual obligations? How and when is the threat of holdup mitigated in practice (as the evidence indicates it must be)? Through a stylized dynamic economic model, we study the evolving relationship between a manufacturer and its supplier wherein the manufacturer has the opportunity to ‘hold up’ the supplier. Our model has three essential features: (i) A dynamic (two-period) setting to capture repeated interactions between the manufacturer and its supplier; (ii) Manufacturers who are, with some probability, rational (i.e., expected utility maximizers) or honest (i.e., committed to honor their ex ante contractual obligations); and (iii) A tendency for both types of manufacturer to tremble into myopic behavior—manufacturers may play their optimal myopic (single-period) strategy, even when this differs from their optimal dynamic strategy, for reasons ranging from bounded rationality to intra-firm incentive conflicts. We prove that: (i) the mere possibility of honest manufacturers can elicit honest behavior from rational manufacturers, thereby mitigating the hold-up problem; and (ii) under very reasonable conditions, the honest manufacturer obtains greater profit than the rational manufacturer, even though the rational manufacturer’s strategy space includes mimicking the honest manufacturer (but not vice-versa). Thus, honesty can emerge endogenously as the optimal policy, the hold-up problem is mitigated, and all parties are better off in equilibrium. (Joint work with He Chen and Manu Goyal)
Speaker: Hyun-Soo Ahn, Associate Professor at University of Michigan
Title: The Role of Cost Modeling in Competitive Bid Procurement
Abstract: Many firms increasingly rely on suppliers for intermediate and finished goods. Some companies (e.g., CISCO) even eliminated in-house production capabilities. While production outsourcing is often cost-effective, firms also lose some manufacturing and technical capabilities that are relevant to estimate production cost. One way to address this is creating cost models to estimate the costs of potential suppliers so that the firm can use the information to negotiate an attractive price with suppliers. However, in settings where the buyer wishes to negotiate a contract price by soliciting competitive bids from multiple suppliers, the benefit of cost modeling is not clear since the bidding competition among suppliers can itself reveal cost information. In this paper, we examine this interplay, and examine if and when cost modeling should be used prior to competitive bidding.
We show that although bid competition sometimes duplicates the information gleaned by cost modeling, cost modeling can still be benefit the buyer by helping the buyer to tighten a reserve price. We then analyze under what situations the buyer can gain the most benefit through cost modeling. Specifically, we characterize which supplier(s) to learn about, which portion(s) of the costs to learn, and how deeply the buyer should learn. We then apply these results to design the optimal learning strategy when the buyer has multiple supply bases and/or costs are correlated. Interestingly, learning about the supplier whose cost is the most uncertain is not necessarily optimal, nor is learning about the cost portion that contributes most to the total cost. We also show that conventional intuition that the benefit of additional information has a diminishing rate of return does not always apply when it comes to cost modeling.
Speaker: Grace Lin, VP & Director General at Advanced Research Center Institute for Information Industry, Taipei, Taiwan
Title: Sustainable Globally Integrated Enterprise (GIE)
Abstract: In this chapter, we present the globally integrated enterprise (GIE) as an emerging business model with strong implications for how companies run and operate their global supply-and-demand chains. The GIE shifts the focus from an efficiency-driven model to a value-driven one which leverages and integrates global capabilities to deliver value speedily, seamlessly, and in a flexible way, while maximizing profits. A GIE is a complex organization that faces many challenges. The evolution of the supply chain in the last 20 years has paved the way for the Operation Research (OR)-enabled Sense-and-Respond Value Net that supports today’s GIE needs. We present a GIE case study of a business transformation journey. We then describe the next steps for GIE to become more socially, economically, and environmentally responsible through the use of OR, business analytics, and IT.