Knowledge that Transforms

This paper presents evidence that the willingness to punish an unfair action is sensitive to whether this action was preceded by a deceptive message. One player first sends a message indicating an intended play, which is either favorable or unfavorable to the other player in the game. After the message, the sender and the receiver play a simultaneous 2×2 game, in which the sender may or may not play according to his message. Outcome cells may, hence, be reached following true or false messages. In the third stage, the receiver may (at a cost) punish or reward, depending on which cell of the simultaneous game has been reached. We test whether receivers' rates of monetary sacrifice depend on the process by which an outcome is reached. We study two decision-elicitation methods: the strategy and the direct response methods. For each method, deception more than doubles the punishment rate as a response to an action that is unfavorable to the receiver. We also find evidence that 17–25% of all participants choose to reward a favorable action choice made by the sender, even though doing so leaves one at a payoff disadvantage. Our results reflect on current economic models of utility and have implications for organizational decision-making behavior.

In this paper a new mixed integer programming (MIP) model formulation and its incorporation into a time-oriented decomposition heuristic for the capacitated lot-sizing problem with linked lot sizes (CLSPL) is proposed. The solution approach is based on an extended model formulation and valid inequalities to yield a tight formulation. Extensive computational tests prove the capability of this approach and show a superior solution quality with respect to other solution algorithms published so far.

This paper examines the conditions under which exploration of a new, incompatible technologyis conducive to firm growth in the presence of network externalities. In particular, this study is motivated by the divergent evolutions of the PC and the workstation markets in response to a new technology: reduced instruction set computing (RISC). In the PC market, Intel has developed new microprocessors by maintaining compatibility with the established architecture, whereas it was radically replaced by RISC in the workstation market. History indicates that unlike the PC market, the workstation market consisted of a large number of power users, who are less sensitive to compatibility than ordinary users. Our numerical analysis indicates that the exploration of a new, incompatible technology is more likely to increase the chance of firm growth when there are a substantial number of power users or when a new technology is introduced before an established technology takes off.

To date, the largest part of literature on multi-unit auctions has assumed that there are k homogeneous objects being auctioned, where each bidder wishes to win exactly one or all of k units. These modeling assumptions have made the examination of ordering in sequential auctions inconsequential. The aim of this paper is to introduce and highlight the critical influence that ordering can have on the efficiency of an auction. We study a buyer who outsources via sequential 2nd-price auctions two heterogeneous jobs, and faces a diverse set of suppliers with capacity constraints.

It is often assumed that financial markets are frictionless. Bond markets are illiquid and bond prices are observed with errors. The magnitude of these errors leads to violation of no–arbitrage conditions and, consequently, prevents researchers from obtaining an estimate of the term structure (TS) of interest rates. Researchers have had to settle for a second–best estimate of the TS (e.g., obtained via regression) at a cost of an economically unrealistic assumption of symmetric market frictions. The true shape of market frictions, however, is not known and generally is a highly complex issue. A no–arbitrage–based methodology that avoids making detrimental assumptions is developed here. It facilitates empirical investigation of the shape of the market frictions and of the TS that are simultaneously imputed from market data assuming “efficient” market frictions that minimize the maximum net arbitrage. The empirical investigation performed in the Canadian and U.S. markets shows that in both markets the frictions are asymmetric and the estimates of the TS produced via regression and our methodology significantly differ.

We investigate the salesforce compensation strategy of a firm selling products in a category that several consumers find technically sophisticated, such as electronics or financial products with legal fine print. Consumers are unable to judge the value difference between a baseline product and a product upgrade with add-on features. While the firm and the salespeople are informed of the value of these features, consumers are uncertain. Thus, consumers have to rely on sales assistance to evaluate alternatives. The salesperson decision variables include selling effort and whether to “oversell” the consumer by overclaiming the value of added features. Because sales revenue depends on both the salesperson's selling effort and consumers' valuation of the added features, the salesforce incentive scheme (which can consist of salary, sales commission, or consumer satisfaction-based commission) may induce the short-term oriented salesperson to misrepresent the value of the upgrade. Exaggeration of the value of the added features, however, results in reduced satisfaction levels leading to lower profits for the firm. We show that a salesperson selling products where the value of the upgrade is low prefers to make higher claims when the sales commission rate is sufficiently high. We conjecture that consumers aware of the incentive structure facing the salesperson expect the true value of the add-on feature to be lower than the claimed value. We study the optimal compensation scheme of a firm, which has to communicate her true type and retain its salesforce credibility. We identify the conditions under which a high-upgrade-type firm indicates its true value by altering sales commission rate and satisfaction-based commission rate.

When platform-based manufacturing exhibits overdesign costs then platform adoption will lead to a decrease in product line differentiation. In contrast, Krishnan and Gupta (2001) argued that in the presence of overdesign costs and platform economies, platform production always leads to a more differentiated product family. While Krishnan and Gupta analyzed one particular parameterized cost function and define overdesign costs and platform economies narrowly in terms of their parameters, I propose a general definition of overdesign costs and show that platform adoption reduces product differentiation for all cost functions satisfying this definition, regardless of whether or not they exhibit platform economies.

Based on data from firms in the personal computer industry, we study the effect of new product introductions on three key drivers of firm value: profit rate, profit-rate persistence, and firm size as reflected in asset growth. Consistent with our theoretical development, we find that new product introductions influence profit rate and size; however, we find no effect on profit-rate persistence. Interestingly, we also find that the effect of new product introductions on profit rate stems from a reduction in selling and general administrative expenditure intensity rather than through an increase in gross operating return. Notably, firms decrease their advertising intensity in the wake of a new product introduction. Firm profitability in this industry apparently benefits from new product introductions because new products need less marketing support than older products.

This paper compares how managers value knowledge from internal and external sources. Although many theories account for favoritism toward insiders, we find that preferences for knowledge obtained from outsiders are also prevalent. Two complementary case studies and survey data from managers demonstrate the phenomenon of valuing external knowledge more highly than internal knowledge and reveal some mechanisms through which this process occurs. We found evidence that the preference for outsider knowledge is the result of managerial responses to (1) the contrasting status implications of learning from internal versus external competitors, and (2) the availability or scarcity of knowledge-internal knowledge is more readily available and hence subject to greater scrutiny, while external knowledge is more scarce, which makes it appear more special and unique. We conclude by considering some consequences of the external knowledge preference for organizational functioning.

Internet-enabled markets are becoming viable venues for procurement of professional services. We investigate bidding behavior within the most active area of these early knowledge markets—the market for software development. These markets are important both because they provide an early view of the effectiveness of online service markets and because they have a potentially large impact on how software development services are procured and provided. Using auction theory, we develop a theoretical model that relates market characteristics to bidding and transaction behavior, taking into account costly bidding. We then test our model using data from an active online market for software development services, which yields contracts for 30%–40% of posted projects. In its current format, however, the studied market may induce excessive bidding by vendors. Consistent with our theoretical predictions and those of Carr (2003), higher-value projects attract significantly more bids, with lower average quality. Greater numbers of bids raise the cost to all participants, due to costly bidding and bid evaluation. Perhaps as a consequence, higher-value projects are also much less likely to be awarded.