Switching costs,dynamic uncertainty,and buyer–seller relationships

We analyze strategic relationships between buyers and sellers in markets with switching costs and dynamic uncertainty by investigating the scenario wherein a representative buyer trades with two foreign sellers located in the same foreign country. We show that, under exchange rate uncertainty, switching costs may lead to switching equilibria where both sellers co‐exist in the market with the buyer, or no‐switching equilibria where either seller captures the market. The presence of exchange rate uncertainty facilitates competition by allowing the sellers to co‐exist in the market with the buyer. However, if the level of uncertainty is beyond a threshold, the only viable equilibria are those where one of the sellers captures the market. Further, depending on the level of exchange rate uncertainty and the sellers' variable costs, switching costs may either raise or lower the level of prices in long‐term contracts between the buyer and the sellers. © 2007 Wiley Periodicals, Inc. Naval Research Logistics, 2007     

Timing of information acquisition in a competitive environment

This article investigates the impact of timing on sellers' information acquisition strategies in a duopoly setting. Market uncertainty is captured by a representative consumer who has a private taste for the product's horizontal attribute, and both sellers can acquire this information either before (ex‐ante acquisition) or after (ex‐post acquisition) observing their own product qualities. We identify several conflicting effects of information acquisition that vary significantly in its timing and market characteristics. In the monopoly scenario, information acquisition is unambiguously beneficial and ex‐ante acquisition is the dominant option, because it helps a seller not only design the proper product but also craft better pricing strategy. By contrast, when there is competition, information acquisition eliminates the buffer role of market uncertainty and leads to the fiercest production or pricing competition, which makes the subsequent effects of acquisition detrimental, and a seller's payoff is nonmonotonic in terms of its acquisition cost. Moreover, compared with the ex‐ante information acquisition, ex‐post information acquisition normally generates higher sellers' equilibrium payoffs by postponing the timing of acquisition and maintaining product differentiation. Nonetheless, ex‐post information acquisition also provides the seller with greater acquisition incentive and occasionally makes him worse off than that in the ex‐ante scenario. Thus, in a competitive environment, having the option of information acquisition and flexibility in its timing can be both detrimental and irresistible. © 2016 Wiley Periodicals, Inc. Naval Research Logistics 63: 3–22, 2016     

Return policy: Hassle‐free or your money‐back guarantee?

This article compares the profitability of two pervasively adopted return policies—money‐back guarantee and hassle‐free policies. In our model, a seller sells to consumers with heterogeneous valuations and hassle costs. Products are subject to quality risk, and product misfit can only be observed post‐purchase. While the hassle‐free policy is cost advantageous from the seller's viewpoint, a money‐back guarantee allows the seller to fine‐tune the consumer hassle on returning the product. Thus, when the two return policies lead to the same consumer behaviors, the hassle‐free policy dominates. Conversely, a money‐back guarantee can be more profitable even if on average, high‐valuation consumers experience a lower hassle cost than the low‐valuation ones. The optimal hassle cost can be higher when product quality gets improved; thus, it is not necessarily a perfect proxy or signal of the seller's quality. We further allow the seller to adopt a mixture of these policies, and identify the concrete operating regimes within which these return policies are optimal among more flexible policies. © 2014 Wiley Periodicals, Inc. Naval Research Logistics 61: 403–417, 2014     

A sequential auction‐bargaining procurement model

One of the most important decisions that a firm faces in managing its supply chain is a procurement decision: selecting suitable suppliers among many potential competing sellers and reducing the purchase cost. While both auctions and bargaining have been extensively studied in the literature, the research that combines auctions and bargaining is limited. In this article, we consider a combined auction‐bargaining model in a setting where a single buyer procures an indivisible good from one of many competing sellers. The procurement model that we analyze is a sequential model consisting of the auction phase followed by the bargaining phase. In the auction phase, the sellers submit bids, and the seller with the lowest bid is selected as the winning bidder. In the bargaining phase, the buyer audits the cost of the winning seller and then negotiates with him to determine the final price. For this auction‐bargaining model, we find a symmetric equilibrium bidding strategy for the sellers in a closed form, which is simple to understand and closely related to the classical results in the auction and bargaining literature. We also show that the auction‐bargaining model generates at least as much profit to the buyer as the standard auction or sequential bargaining model. © 2009 Wiley Periodicals, Inc. Naval Research Logistics, 2010     

Synchronizing pricing and replenishment to serve forward-looking customers

We incorporate strategic customer waiting behavior in the classical economic order quantity (EOQ) setting. The seller determines not only the timing and quantities of the inventory replenishment, but also the selling prices over time. While similar ideas of market segmentation and intertemporal price discrimination can be carried over from the travel industries to other industries, inventory replenishment considerations common to retail outlets and supermarkets introduce additional features to the optimal pricing scheme. Specifically, our study provides concrete managerial recommendations that are against the conventional wisdom on “everyday low price” (EDLP) versus “high-low pricing” (Hi-Lo). We show that in the presence of inventory costs and strategic customers, Hi-Lo instead of EDLP is optimal when customers have homogeneous valuations. This result suggests that because of strategic customer behavior, the seller obtains a new source of flexibility—the ability to induce customers to wait—which always leads to a strictly positive increase of the seller's profit. Moreover, the optimal inventory policy may feature a dry period with zero inventory, but this period does not necessarily result in a loss of sales as customers strategically wait for the upcoming promotion. Furthermore, we derive the solution approach for the optimal policy under heterogeneous customer valuation setting. Under the optimal policy, the replenishments and price promotions are synchronized, and the seller adopts high selling prices when the inventory level is low and plans a discontinuous price discount at the replenishment point when inventory is the highest.     

Inventory control and replenishment with flexible delivery‐time upgrade

We consider a capacitated inventory model with flexible delivery upgrades, in which the seller allocates its on‐hand inventory to price‐ and delivery‐time‐sensitive customers. The seller has two decisions: inventory commitment and replenishment. The former addresses how the on‐hand inventories are allocated between the two classes of customers within an inventory cycle. The latter addresses how the inventory is replenished between inventory cycles. We develop optimal inventory allocation, upgrade, and replenishment policies and demonstrate that the optimal policy can be characterized by a set of switching curves. © 2014 Wiley Periodicals, Inc. Naval Research Logistics 61: 418–426, 2014     

Resale price maintenance contracts with retailer sales effort: Effect of flexibility and competition

In Resale Price Maintenance (RPM) contracts, the manufacturer specifies the resale price that retailers must charge to consumers. We study the role of using a RPM contract in a market where demand is influenced by retailer sales effort. First, it is well known that RPM alone does not provide incentive for the retailer to use adequate sales effort and some form of quantity fixing may be needed to achieve channel coordination. However, when the market potential of the product is uncertain, RPM with quantity fixing is a rigid contract form. We propose and study a variety of RPM contracts with quantity fixing that offer different forms of flexibility including pricing flexibility and quantity flexibility. Second, we address a long‐time debate in both academia and practice on whether RPM is anti‐competitive in a market when two retailers compete on both price and sales effort. We show that depending on the relative intensity of price competition and sales effort competition, RPM may lead to higher or lower retail prices compared to a two‐part tariff contract, which specifies a wholesale price and a fixed fee. Further, the impact of RPM on price competition and sales effort competition is always opposite to each other. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2006     

On the core and competitive equilibria of a market with indivisible goods

We consider a generalization of the assignment game of Shapley and Shubik [4]. In the market which we consider, s kinds of indivisible goods are exchanged for money. The market consists of buyers and sellers. Each buyer wants to buy at most one unit of the goods, and each seller may sell more than one unit. First, we show that the set of all competitive imputations is given by the solutions of a certain linear programing problem dual to the optimal problem. Second, we show that the core of the market coincides with the set of all competitive imputations under some condition, and consider the core of the market where s=1 and the condition does not hold.     

Dynamic coordination of production planning and sales admission control in the presence of a spot market

We consider the decision‐making problem of dynamically scheduling the production of a single make‐to stock (MTS) product in connection with the product's concurrent sales in a spot market and a long‐term supply channel. The spot market is run by a business to business (B2B) online exchange, whereas the long‐term channel is established by a structured contract. The product's price in the spot market is exogenous, evolves as a continuous time Markov chain, and affects demand, which arrives sequentially as a Markov‐modulated Poisson process (MMPP). The manufacturer is obliged to fulfill demand in the long‐term channel, but is able to rein in sales in the spot market. This is a significant strategic decision for a manufacturer in entering a favorable contract. The profitability of the contract must be evaluated by optimal performance. The current problem, therefore, arises as a prerequisite to exploring contracting strategies. We reveal that the optimal strategy of coordinating production and sales is structured by the spot price dependent on the base stock and sell‐down thresholds. Moreover, we can exploit the structural properties of the optimal strategy to conceive an efficient algorithm. © 2010 Wiley Periodicals, Inc. Naval Research Logistics, 2010     

Inventory control and periodic price discounting campaigns

This paper develops an inventory model that determines replenishment strategies for buyers facing situations in which sellers offer price‐discounting campaigns at random times as a way to drive sales or clear excess inventory. Specifically, the model deals with the inventory of a single item that is maintained to meet a constant demand over time. The item can be purchased at two different prices denoted high and low. We assume that the low price goes into effect at random points in time following an exponential distribution and lasts for a random length of time following another exponential distribution. We highlight a replenishment strategy that will lead to the lowest inventory holding and ordering costs possible. This strategy is to replenish inventory only when current levels are below a certain threshold when the low price is offered and the replenishment is to a higher order‐up‐to level than the one currently in use when inventory depletes to zero and the price is high. Our analysis provides new insight into the behavior of the optimal replenishment strategy in response to changes in the ratio of purchase prices together with changes in the ratio of the duration of a low‐price period to that of a high‐price period. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2007.     

Dynamic pricing in a dual‐market environment

This article is concerned with the determination of pricing strategies for a firm that in each period of a finite horizon receives replenishment quantities of a single product which it sells in two markets, for example, a long‐distance market and an on‐site market. The key difference between the two markets is that the long‐distance market provides for a one period delay in demand fulfillment. In contrast, on‐site orders must be filled immediately as the customer is at the physical on‐site location. We model the demands in consecutive periods as independent random variables and their distributions depend on the item's price in accordance with two general stochastic demand functions: additive or multiplicative. The firm uses a single pool of inventory to fulfill demands from both markets. We investigate properties of the structure of the dynamic pricing strategy that maximizes the total expected discounted profit over the finite time horizon, under fixed or controlled replenishment conditions. Further, we provide conditions under which one market may be the preferred outlet to sale over the other. © 2015 Wiley Periodicals, Inc. Naval Research Logistics 62: 531–549, 2015     

An integrated electric power supply chain and fuel market network framework: Theoretical modeling with empirical analysis for New England

In this article, we develop a novel electric power supply chain network model with fuel supply markets that captures both the economic network transactions in energy supply markets and the physical network transmission constraints in the electric power network. The theoretical derivation and analysis are done using the theory of variational inequalities. We then apply the model to a specific case, the New England electric power supply chain, consisting of six states, five fuel types, 82 power generators, with a total of 573 generating units, and 10 demand market regions. The empirical case study demonstrates that the regional electric power prices simulated by our model match the actual electricity prices in New England very well. We also compute the electric power prices and the spark spread, an important measure of the power plant profitability, under natural gas and oil price variations. The empirical examples illustrate that in New England, the market/grid‐level fuel competition has become the major factor that affects the influence of the oil price on the natural gas price. Finally, we utilize the model to quantitatively investigate how changes in the demand for electricity influence the electric power and the fuel markets from a regional perspective. The theoretical model can be applied to other regions and multiple electricity markets under deregulation to quantify the interactions in electric power/energy supply chains and their effects on flows and prices. © 2009 Wiley Periodicals, Inc. Naval Research Logistics, 2009     

Optimal pricing for a short life‐cycle product when customer price‐sensitivity varies over time

Technology products often experience a life‐cycle demand pattern that resembles a diffusion process, with weak demand in the beginning and the end of the life cycle and high demand intensity in between. The customer price‐sensitivity also changes over the life cycle of the product. We study the prespecified pricing decision for a product that exhibits such demand characteristics. In particular, we determine the optimal set of discrete prices and the times to switch from one price to another, when a limited number of price changes are allowed. Our study shows that the optimal prices and switching times show interesting patterns that depend on the product's demand pattern and the change in the customers' price sensitivity over the life cycle of the product. © 2012 Wiley Periodicals, Inc. Naval Research Logistics, 2012     

Economic and environmental impacts of vertical and horizontal competition and integration

We explore the economic and environmental impacts of market structures (competition or integration at vertical and horizontal levels). We consider a bilateral duopoly consisting of two manufacturers and two retailers in which each manufacturer offers a wholesale price contract to the respective retailer. The manufacturers decide on wholesale prices and abatement efforts concerning pollution emissions related to manufacturing processes, whereas the retailers compete in quantities in the consumer market. To understand the comprehensive effects of market structures on economic competitiveness and environmental sustainability, we examine a measure of eco‐friendly social welfare, which is the ratio of social welfare and environmental pollution. Interestingly, we find that the market structures that have been believed to be more efficient are less efficient from a broader perspective: (1) double marginalization can generate higher eco‐friendly social welfare, and (2) horizontal competition between firms can result in lower eco‐friendly social welfare. Although vertical integration and horizontal competition yield greater social welfare by facilitating more production activities, these market structures often fail to induce sufficient abatement efforts to balance the polluting effect of the large volume, resulting in more significant environmental degradation. We also show that, despite the pollution‐curbing effect, higher emission penalties can result in less eco‐friendly social welfare. They can even curtail the abatement efforts of firms under particular circumstances. When products become more substitutable, the eco‐friendly social welfare can decrease depending upon the market structure.     

Alleviating time inconsistent behaviors via a competition scheme

Under quasi‐hyperbolic discounting, the valuation of a payoff falls relatively rapidly for earlier delay periods, but then falls more slowly for longer delay periods. When the salespersons with quasi‐hyperbolic discounting consider the product sale problem, they would exert less effort than their early plan, thus resulting in losses of future profit. We propose a winner‐takes‐all competition to alleviate the above time inconsistent behaviors of the salespersons, and allow the company to maximize its revenue by choosing an optimal bonus. To evaluate the effects of the competition scheme, we define the group time inconsistency degree of the salespersons, which measures the consequence of time inconsistent behaviors, and two welfare measures, the group welfare of the salespersons and the company revenue. We show that the competition always improves the group welfare and the company revenue as long as the company chooses to run the competition in the first place. However, the effect on group time inconsistency degree is mixed. When the optimal bonus is moderate (extreme high), the competition motivates (over‐motivates) the salesperson to work hard, thus alleviates (worsens) the time inconsistent behaviors. © 2017 Wiley Periodicals, Inc. Naval Research Logistics 64: 357–372, 2017     

Competing with channel partners: Supply chain conflict when retailers introduce store brands

Private‐label products are of increasing importance in many retail categories. While national‐brand products are designed by the manufacturer and sold by the retailer, the positioning of store‐brand products is under the complete control of the retailer. We consider a scenario where products differ on a performance quality dimension and we analyze how retailer–manufacturer interactions in product positioning are affected by the introduction of a private‐label product. Specifically, we consider a national‐brand manufacturer who determines the quality of its product as well the product's wholesale price charged to the retailer. Given the national‐brand quality and wholesale price, the retailer then decides the quality level of its store brand and sets the retail prices for both products. We find that a manufacturer can derive substantial benefits from considering a retailer's store‐brand introduction when determining the national brand's quality and wholesale price. If the retailer has a significant cost disadvantage in producing high‐quality products, the manufacturer does not need to adjust the quality of the national‐brand product, but he should offer a wholesale price discount to ensure its distribution through the retailer. If the retailer is competitive in providing products of high‐quality, the manufacturer should reduce this wholesale price discount and increase the national‐brand quality to mitigate competition. Interestingly, we find the retailer has incentive to announce a store‐brand introduction to induce the manufacturer's consideration of these plans in determining the national‐brand product quality and wholesale price. © 2010 Wiley Periodicals, Inc. Naval Research Logistics, 2010     

Stability in a general oligopoly model

We analyze a general but parsimonious price competition model for an oligopoly in which each firm offers any number of products. The demand volumes are general piecewise affine functions of the full price vector, generated as the “regular” extension of a base set of affine functions. The model specifies a product assortment, along with their prices and demand volumes, in contrast to most commonly used demand models. We identify a fully best response operator which is monotonically increasing so that the market converges to a Nash equilibrium, when firms dynamically adjust their prices, as best responses to their competitors' prices, at least when starting in one of two price regions. Moreover, geometrically fast convergence to a common equilibrium can be guaranteed for an arbitrary starting point, under an additional condition for the price sensitivity matrix.     

Dynamic inventory and pricing models for competing retailers

We address infinite‐horizon models for oligopolies with competing retailers under demand uncertainty. We characterize the equilibrium behavior which arises under simple wholesale pricing schemes. More specifically, we consider a periodic review, infinite‐horizon model for a two‐echelon system with a single supplier servicing a network of competing retailers. In every period, each retailer faces a random demand volume, the distribution of which depends on his own retail price as well as those charged by possibly all competing retailers. We also derive various comparative statics results regarding the impact several exogenous system parameters (e.g., cost or distributional parameters) have on the equilibrium decisions of the retailers as well as their expected profits. We show that certain monotonicity properties, engrained in folklore as well as in known inventory models for centralized systems, may break down in decentralized chains under retailer competition. Our results can be used to optimize the aggregate profits in the supply chain (i.e., those of the supplier and all retailers) by implementing a specific wholesale pricing scheme. © 2003 Wiley Periodicals, Inc. Naval Research Logistics, 2004.     

Strategic dynamic sourcing from competing suppliers with transferable capacity investment

We study the supplier relationship choice for a buyer that invests in transferable capacity operated by a supplier. With a long‐term relationship, the buyer commits to source from a supplier over a long period of time. With a short‐term relationship, the buyer leaves open the option of switching to a new supplier in the future. The buyer has incomplete information about a supplies efficiency, and thus uses auctions to select suppliers and determine the contracts. In addition, the buyer faces uncertain demand for the product. A long‐term relationship may be beneficial for the buyer because it motivates more aggressive bidding at the beginning, resulting a lower initial price. A short‐term relationship may be advantageous because it allows switching, with capacity transfer at some cost, to a more efficient supplier in the future. We find that there exists a critical level of the switching cost above which a long‐term relationship is better for the buyer than a short‐term relationship. In addition, this critical switching cost decreases with demand uncertainty, implying a long‐term relationship is more favorable for a buyer facing volatile demand. Finally, we find that in a long‐term relationship, capacity can be either higher or lower than in a short‐term relationship. © 2009 Wiley Periodicals, Inc. Naval Research Logistics 2009     

Flexible capacity strategy in an asymmetric oligopoly market with competition and demand uncertainty

This article studies flexible capacity strategy (FCS) under oligopoly competition with uncertain demand. Each firm utilizes either the FCS or inflexible capacity strategy (IFCS). Flexible firms can postpone their productions until observing the actual demand, whereas inflexible firms cannot. We formulate a new asymmetrical oligopoly model for the problem, and obtain capacity and production decisions of the firms at Nash equilibrium. It is interesting to verify that cross‐group competition determines the capacity allocation between the two groups of firms, while intergroup competition determines the market share within each group. Moreover, we show that the two strategies coexist among firms only when cost differentiation is medium. Counterintuitively, flexible firms benefit from increasing production cost when the inflexible competition intensity is sufficiently high. This is because of retreat of inflexible firms, flexibility effect, and the corresponding high price. We identify conditions under which FCS is superior than IFCS. We also demonstrate that flexible firms benefit from increasing demand uncertainty. However, when demand variance is not very large, flexible firms may be disadvantaged. We further investigate the effects of cross‐group and intergroup competition on individual performance of the firms. We show that as flexible competition intensity increases, inflexible firms are mainly affected by the cross‐group competition first and then by the intergroup competition, whereas flexible firms are mainly affected by the intergroup competition. Finally, we examine endogenous flexibility and identify its three drivers: cost parameters, cross‐group competition, and intergroup competition. © 2017 Wiley Periodicals, Inc. Naval Research Logistics 64: 117–138, 2017