Knowledge that Transforms

As an integrated part of a supply contract, trade credit has intrinsic connections with supply chain coordination and inventory management. Using a model that explicitly captures the interaction of firms’ operations decisions, financial constraints, and multiple financing channels (bank loans and trade credit), this paper attempts to better understand the risk-sharing role of trade credit—that is, how trade credit enhances supply chain efficiency by allowing the retailer to partially share the demand risk with the supplier. Within this role, in equilibrium, trade credit is an indispensable external source for inventory financing, even when the supplier is at a disadvantageous position in managing default relative to a bank. Specifically, the equilibrium trade credit contract is net terms when the retailer’s financial status is relatively strong. Accordingly, trade credit is the only external source that the retailer uses to finance inventory. By contrast, if the retailer’s cash level is low, the supplier offers two-part terms, inducing the retailer to finance inventory with a portfolio of trade credit and bank loans. Further, a deeper early-payment discount is offered when the supplier is relatively less efficient in recovering defaulted trade credit, or the retailer has stronger market power. Trade credit allows the supplier to take advantage of the retailer’s financial weakness, yet it may also benefit both parties when the retailer’s cash is reasonably high. Finally, using a sample of firm-level data on retailers, we empirically observe the inventory financing pattern that is consistent with what our model predicts.

We analyze the effect of accounting bias on the competition and market structure of an industry. In our model, firms’ interim accounting reports on investment projects may contain bias introduced by the mandatory accounting system. We find that this bias strictly decreases firms’ profits when investors do not have an abandonment option, but different results emerge when we allow the investors to divest in the interim. Specifically, a conservative accounting regime may increase the likelihood of projects being discontinued, inducing some firms to exit from the product market and leaving rivals to capture their market share. A conservative regime can thus soften market competition and result in ex ante higher investment payoff, higher consumer surplus, and higher total social welfare. Since industries often have common reporting standards, we also identify the degrees of industry-wide accounting bias that maximize the expected investor payoffs. Finally, we allow for investors to coordinate their divestment decisions when both firms report unfavorable costs and show an improvement to both firm profits and consumer surplus.

We study the problem of optimal dynamic pricing for a monopolist selling a product to consumers in a social network. In the proposed model, the only means of spread of information about the product is via word-of-mouth communication; consumers’ knowledge of the product is only through friends who already know about the product’s existence. Both buyers and nonbuyers contribute to information diffusion, while buyers are more likely to spread the news about the product. By analyzing the structure of the underlying endogenous dynamic process, we show that the optimal dynamic pricing policy for durable products with zero or negligible marginal cost drops the price to zero infinitely often. The firm uses free offers to attract low-valuation agents and to get them more engaged in the spread. As a result, the firm can reach potential high-valuation consumers in parts of the network that would otherwise remain untouched without the price drops. We provide evidence for this behavior from the smartphone app market, where price histories indicate frequent zero-price sales. Moreover, we show that despite dropping the price to zero infinitely often, the optimal price trajectory does not get trapped near zero. We demonstrate the validity of our results in the face of forward-looking consumers and homophily in word-of-mouth engagement. We further unravel the key role of the product type in the optimality of zero-price sales by showing that the price fluctuations disappear after a finite time for a nondurable product.

In this paper, we extend the understanding of versioning strategy of an information goods monopolist and provide new insights on when versioning is optimal. To do so, we derive the optimal product line or versions of an information good and the corresponding prices. By relaxing common assumptions on consumers’ usage costs, versioning costs and capital research and development costs, we provide new insights as well as reconcile extant findings on versioning. For a good with no-free-disposal (NFD), i.e., one where consumers have usage costs, our results show that a monopolist’s marginal cost and consumers’ usage costs have the same impact on its versioning strategy, and that these factors are the sole reason for optimality of versioning of information goods. By endogenizing the production of the highest-quality, we show that capital costs create a downward distortion of quality even for the highest types in the market even under full information. Presence of separate versioning costs also lowers the qualities served to the high types and reduces the segment of consumers who are served with product versions. However, versioning costs do not affect market coverage or the price-quality menu itself. Further, when some of the consumer usage costs are absorbed by the firm (as in case of cloud-based provisioning), it does not necessarily lead to market expansion.

The new perspective emerging from strategy’s value-capture stream is that the effects of competition are twofold: competition for an agent bounds its performance from below, while that for its transaction partners bounds from above. Thus, assessing the intensity of competition on either side is essential to understanding firm performance. Yet, the literature provides no formal notion of “competitive intensity” with which to make such assessments. Rather, some authors use added value as their central analytic concept, others the core. Added value is simple but misses the crucial, for-an-agent side of competition. The core is theoretically complete but difficult to interpret and empirically intractable. This paper formalizes three, increasingly general notions of competitive intensity, all of which improve on added value while avoiding the complexity of the core. We analyze markets characterized by disjoint networks of agents (e.g., supply chains), providing several insights into competition and new tools for empirical work. The online supplement is available at https://doi.org/10.1287/mnsc.2017.2737 .

This paper examines how the enforceability of noncompete covenants affects the creation, growth, and survival of spinouts and other new entrants. The impact of noncompete enforceability on new firms is ambiguous, since noncompetes reduce knowledge leakage but impose hiring costs. However, we posit that enforceability screens formation of within-industry spinouts (WSOs) relative to non-WSOs by dissuading founders with lower human capital. Using data on 5.5 million new firms, we find greater enforceability is associated with fewer WSOs, but relative to non-WSOs, WSOs that are created tend to start and stay larger, are founded by higher-earners, and are more likely to survive their initial years. In contrast, we find no impact on non-WSO entry and a negative effect on size and short-term survival. The online appendix is available at https://doi.org/10.1287/mnsc.2016.2614 .

This study provides novel evidence that expert economic agents’ work-related activities are systematically influenced by the time of day. We use archival data derived from time-stamped quarterly earnings conference calls together with linguistic algorithms to measure and track the moods of executives and analysts at different times of the day. The evidence indicates that the tone of conference call discussions deteriorates markedly over the course of the trading day, with both analysts’ and executives’ moods becoming more negative as the day wears on. Capital market pricing tests reveal that the time-of-day-induced negative tone leads to temporary stock mispricings. Our findings are relevant because the diurnal variations in behavior documented in the context of quarterly earnings calls are likely to extend across other important corporate communication, decision making, and performance situations, leading to potentially significant economic consequences.

“Bespoke,” or mass customization strategy, combines demand learning and preference learning. We develop an analytical framework to study the economic value of bespoke systems and investigate the interaction between demand learning and preference learning. We find that it is possible for demand learning and preference learning to be either complements or substitutes, depending on the customization cost and the demand uncertainty profile. They are generally complements when the personalization cost is low and the probability of having high demand is large. Contrary to usual belief, we show that higher demand uncertainty does not necessarily yield more complementarity benefits. Our numerical study shows that the complementarity benefit becomes weaker when customers are more strategic. Interestingly, the substitute loss can occur when the personalization cost is small and the probability of having high demand is large, when customers are strategic. The online supplement is available at https://doi.org/10.1287/mnsc.2017.2771 .

We advance the literature on dynamic oligopoly pricing models in the presence of switching costs by additionally modeling the strategic pricing role of the retailer within the distribution channel. In doing this, we study the relative dynamic pricing implications of how current retail and wholesale prices for a brand must optimally take into account past and future demand, respectively, for the brand. Using scanner data from the cola market, we find that while the retailer exploits the benefit of inertial demand by appropriately increasing the retail profit margin, the cost of investing is borne entirely by the manufacturers. We use simulation studies to show how the retailer will lose its ability to leverage the benefits of inertial demand as consumers become more price sensitive. We also show that when inertia of the more price-sensitive customer segment increases, the aggregate welfare of consumers, the retailer, and manufacturers may increase. Data, as supplemental material, are available at https://doi.org/10.1287/mnsc.2016.2649 .

Many restaurants have recently implemented self-order technologies across both online and offline channels. Online technology, through websites and mobile apps, allows customers to order and pay before coming to the store; offline technology, such as self-service kiosks, allows store customers to place orders without interacting with a human employee. In this paper, we develop a stylized theoretical model to study the impact of self-order technologies on customer demand, employment levels, and restaurant profits. Our main results follow. First, customers using self-order technologies experience reduced waiting cost and increased demand, and moreover, these benefits may even carry over to customers who do not use these technologies. Second, although public opinion suggests that self-order technologies facilitate job cuts, we find instead that some firms should increase employment levels, and, paradoxically, this recommendation holds for firms with high labor costs. Finally, we find that firms should implement online (offline) self-order technology when customers have high (low) wait sensitivity. The supplementary appendix is available at https://doi.org/10.1287/mnsc.2017.2787 .