Optimizing service failure and damage control

Should a provider deliver a reliable service or should it allow for occasional service failures? This paper derives conditions under which randomizing service quality can benefit the provider and society. In addition to cost considerations, heterogeneity in customer damages from service failures allows the provider to generate profit from selling damage prevention services or offering compensation to high-damage customers. This strategy is viable even when reputation counts and markets are competitive.     

Ownership coordination in a channel: Incentives,returns, and negotiations

In many industries firms have to make quantity decisions before knowing the exact state of demand. In such cases, channel members have to decide which firm will own the units until demand uncertainty is resolved. The decision about who should retain ownership depends on the balance of benefit and risk to each member. Ownership, after all, is costly. Whichever member owns the units accepts the risk of loss if more units are produced than can be sold. But ownership also grants firms the flexibility to respond to demand once it becomes known by adjusting price. In this study, we analyze ownership decisions in distribution channels and how those decisions are affected by demand uncertainty. We model demand based on micro-modeling of consumer utility functions and capture demand uncertainty related to market size and price sensitivity. This study shows that as long as the degree of uncertainty about market size is intermediate, the retailer and the manufacturer both benefit when the manufacturer maintains ownership of the units. But when there is substantial uncertainty about market size, the retailer and the channel are better off if the retailer takes ownership but the manufacturer still prefers to maintain ownership. Thus, there is potential for channel conflict regarding ownership under high levels of uncertainty. We show that, using product returns, the manufacturer can achieve the same outcome under retailer ownership as under manufacturer ownership. This provides an additional new rationale for the prevalence of product returns. The first-best outcome (from the perspective of total channel profit), however, is under retailer ownership without product returns when uncertainty is high (i.e., product returns reduce the total channel profit). Negotiations between the manufacturer and the retailer can lead to the first-best outcome but only under quite restrictive constraints that include direct side payments by the retailer to the manufacturer and the retailer being pessimistic about its outside option (when an agreement cannot be reached) during the negotiation.     

Mathematical analysis applied to school attendance areas

The objective of this paper is to develop a generalized mathematical model of pupil assignment within school districts. This model can then be used to examine various policies of student integration. Proposed bussing schemes, school location policies, educational parks, attendance boundaries, etc., can be tested for cost, travel time or other measures of efficiency. Extension to other areas of educational planning is feasible.

Mathematical programming techniques are used to assign resources (say school children) to facilities (say schools) subject to restrictions on facilities (say capacity limits) and resources (say a maximum travel time or a desirable range of school “mixtures”) so that a measure of performance, the “objective function” (say total cost or total time of travel) is optimized. The model is intended to allow examination of a wide range of objective functions and system constraints.     

Price discrimination in service industries

This article outlines recent methods and applications directed at understanding the profit and consumer welfare implications of increasingly prevalent price discrimination strategies in the service sector. These industries are typically characterized by heterogeneity in consumers?? valuation and usage of the service, resale constraints, and a focus on price as the service??s key attribute. The article focuses on how firms use nonlinear pricing or bundling strategies to benefit from the heterogeneity in consumer demand. We describe the basic economic model commonly used in the literature to analyze such strategic choices and present recent methodological improvements to this benchmark. A discussion of existing applications and future research opportunities concludes the article.     

easyJet® pricing strategy: Should low-fare airlines offer last-minute deals?

easyJet, one of Europe’s most successful low-cost short-haul airlines, has a simple pricing structure. For a given flight, all prices are quoted one-way, a single price prevails at any point, and, in general, prices are low early on and increase as the departure date approaches. We observe from these policies and from the empirical section of this paper that easyJet employs three distinct strategies: 1) it does not offer last-minute deals, 2) it offers a single class and lets price be the sole variable that controls demand, and 3) it varies the time at which tickets are first offered for sale (duration of sale). The first two policies are in stark contrast to traditional airline pricing strategies. Many airlines offer last-minute deals, either directly or via resellers. Second, the current prevailing practice is to control demand via seat allocation to various classes rather than by offering a single class and letting price be the sole variable that controls demand. The main objective of this research is to study the conditions under which offering a last-minute deal is optimal under the single-price policy. We also learn how the duration of ticket sales is affected by consumer characteristics. We find that, for an intermediate capacity level, uncertainty with respect to the arrival of the business segment will cause the firm to offer last-minute deals and thus partially price-discriminate within the tourist segment. The same is true for uncertainty with respect to the actual behavior of the firm: if consumers are uncertain whether the firm will offer last-minute deals, then, in equilibrium, both in a one-shot game and in a repeated game, the firm will, with some probability, offer such deals. In addition, we found that for an intermediate capacity level, the larger the number of segments (that differ in price sensitivity), the longer the duration of the period in which tickets are offered for sale.

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Electronic supplementary material  The online version of this article (doi:) contains supplementary material, which is available to authorized users.

Choosing a digital content strategy: How much should be free?

Advertising supported content sampling is ubiquitous in online markets for digital information goods. Yet, little is known about the profit impact of sampling when it serves the dual purpose of disclosing content quality and generating advertising revenue. This paper proposes an analytical framework to study the optimal content strategy for online publishers and shows how it is determined by characteristics of both the content market and the advertising market. The strategy choice is among a paid content strategy, a sampling strategy, and a free content strategy, which follow from the publisher's decisions concerning the size of the sample and the price of the paid content. We show that a key driver of the strategy choice is how sampling affects the prior expectations of consumers, who learn about content quality from the inspection of the free samples. Surprisingly, we find that it can be optimal for the publisher to generate advertising revenue by offering free samples even when sampling reduces both prior quality expectations and content demand. In addition, we show that it can be optimal for the publisher to refrain from revealing quality through free samples when advertising effectiveness is low and content quality is high. To illustrate, we relate our framework to the newspaper industry, where the sampling strategy is known as the “metered model.”     

Strategic Decentralization and Channel Coordination

In this paper, we show that under certain conditions, strategic decentralization through the addition of a retailer in the distribution channel can increase a manufacturer's profits. The specific case on which we focus is the quantity coordination (double marginalization) problem for a manufacturer selling durable goods in a two-period setting. We show that the standard solution that coordinates a channel for non-durables does not coordinate the channel for durables. In particular, even though a manufacturer can achieve channel coordination by offering per-period, two-part fees, the equilibrium wholesale price in the first period is strictly above the manufacturer's marginal cost. This is in stark contrast to the two-part solution for non-durables where the equilibrium wholesale price is equal to marginal cost. We also identify a strategy that solves both the channel coordination and the Coase problem associated with durable goods. In this strategy, at the beginning of period 1, the manufacturer writes a contract with the retailer specifying a fixed fee and wholesale prices covering both periods. We show that by adding a retailer and using this contract, the manufacturer makes higher profits than it could if it were to sell directly to consumers.