Knowledge that Transforms

Problem definition: We study a retailer’s category management strategy and interactions with its supply chain partners in a setting in which increasing the store brand (SB) market share in a focal category improves the retailer’s overall profitability by creating demand spillover to other categories. Academic/practical relevance: Unlike most category management research, which focuses on category profit maximization, our research incorporates SB spillover observed in practice into the retailer’s decision making. Methodology: We analyze a game-theoretic model with one retailer, one high-quality national brand (NB) manufacturer, and one low-quality NB manufacturer. The retailer selects the assortment and sets the retail prices, and the NB manufacturers set their wholesale prices. We formulate the retailer’s objective function as a weighted sum of category profit and SB market share, where the weight assigned to the SB market share captures the degree of SB spillover. Results: First, overlooking SB spillover can result in suboptimal assortment and pricing decisions, leading to financial losses for the retailer. The retailer incurs the largest losses when it fails to adjust its assortment to take SB spillover into account, whereas its losses are relatively small when it carries the right assortment but fails to adjust its prices. Second, taking SB spillover into account decreases the retailer’s category profit when the degree of SB spillover is high. However, a low degree of SB spillover may enable the retailer to simultaneously increase its category profit and SB market share. Third, SB spillover is never beneficial for the low-quality NB but may increase the high-quality NB’s profit when the retailer removes the low-quality NB from its assortment. Managerial implications: Our study sheds light on how SB spillover affects the retailer’s assortment and pricing decisions and demonstrates the impact of such decisions on the retailer, the focal category, and the NBs.

Problem definition: We investigate multinational firms’ inspection and pricing strategies to address the challenges of combating child labor in global supply chains. We also examine how several factors (such as information disclosure, goodwill loss, inspection cost, external monitoring by nongovernmental organizations (NGOs), and penalty scheme) affect firms’ incentives to use different strategies to combat child labor. Academic/practical relevance: Nearly 200 million children are engaged in child labor, many in developing countries that are part of the supply base of global manufacturing networks. However, there has been little research on evaluating the impact of firms’ strategies and NGOs’ initiatives on child labor. Methodology: We develop a game-theoretic model based on a two-tier supply chain, in which a multinational firm in a developed country sells the product made by a supplier in a developing country. Results: If internal inspections are economical, a global firm can reduce the incidence of child labor by inspecting the supplier’s use of child labor. Otherwise, the firm can deter the supplier’s child labor employment by offering a sufficiently high wholesale price or simultaneously using internal inspections and a medium wholesale price. The latter strategy should be adopted only when information about the firm’s inspection policy can be informed credibly. This strategy combats child labor more effectively when a higher penalty is levied onto the supplier’s use of child labor. Managerial implications: A multinational firm that adopts a zero-tolerance policy should consider disclosing its effort to combat child labor (e.g., through a social responsibility report), whereas it should take extra caution when using other penalty schemes. NGOs should help raise the firm’s goodwill cost (e.g., through campaigns and consumer education), but they should be careful about helping to reduce the firm’s inspection cost (e.g., by improving a monitoring system). To prevent children from going back to work after initial removal, a sufficient amount of compensation should be provided to those children, especially when firms rely on inspections without paying a high wholesale price to suppliers.

Problem definition: Should the management of research and development (R&D) be persistent in its approach to funding R&D or rather allow for quick reaction and dynamism? Academic/practical relevance: Under a persistent policy, allocations remain nearly constant irrespective of circumstances; under a dynamic policy, R&D spending increases (respectively, declines) when opportunities arise (respectively, fail to materialize). Practitioners give conflicting answers as to which policy is preferable, while there is no rigorous academic guidance. Methodology: We use a sample of 3,711 publicly listed companies, observed for seven years (on average) between 1982 and 2003, to compare the outcomes of these R&D allocation policies. We estimate a firm-level dynamic panel data model, via the “system general method of moments” (S-GMM) approach ( Arellano and Bond 1991 , Blundell and Bond 1998 ), which combines financial information from the Compustat database with patent data provided by the National Bureau of Economic Research (NBER). Results: We find that a dynamic allocation strategy is associated with worse R&D performance in terms of patent quantity and quality. Our results indicate that the originality of an invention, and also the firm's familiarity with an invention's technological basis, are factors that can mitigate or amplify the harm caused by variability. Finally, we establish that R&D performance suffers from the unpredictable part of dynamic spending; the predictable part has either no effect or a positive one. Managerial implications: There are many reasons why managers may wish to alter the level of R&D spending. Some of these reasons (e.g., pursuing technological opportunities) reflect more positive intentions than do others (e.g., chasing targets for earnings). Whatever the rationale for a change in spending, our paper highlights the possible negative consequences that managers should consider; it also documents the contingencies under which adaptation is especially harmful and identifies policies for mitigating adaptation pains. Thus, we offer managers a framework for conceptualizing principles about how best to invest in R&D. Our paper also issues this warning about the goal of hitting quarterly financial targets: if R&D spending is viewed as discretionary when such targets must be met— which is customary (as documented by Roychowdhury 2006) for some publicly traded companies—then one should expect to observe long-term negative consequences that cannot be reversed simply by later restoring or even increasing R&D investment.

Problem definition: We develop a framework for studying the impact of voluntary ecolabels and mandatory environmental regulation on green product development among competing firms. Academic/practical relevance: We contribute to the academic literature on environmental quality competition by explicitly accounting for the credibility of environmental claims made by firms, and by exploring the implications for society of two mechanisms used to remedy credibility-related consumer discounting of firms’ self-declared environmental qualities. We draw parallels between our findings and instances of environmental labeling and regulation from industry to highlight the practical implications of our study. Methodology: We use a game-theoretic framework to analyze a consumer-driven model of green product development. Results: Credibility asymmetry drives product differentiation between two competing firms. The less credible firm always adopts external certification, while the more credible firm does so only if its credibility is sufficiently low. Credibility may also determine whether or not the government should intervene. In the absence of an external certifier, the regulator should intervene by imposing a mandatory environmental standard that is decreasing in stringency as the credibility of the more credible firm increases. In the presence of a certifier, the regulator should intervene if neither firm is sufficiently credible, or if consumers do not value environmental stewardship highly. Managerial implications: We identify how and when government should (and should not) intervene to stimulate green product development when competing firms can use self-labels or external certifications to communicate their environmental performance to consumers. We also determine the optimal strategies for the competing firms and external certifiers.