functional ingredients and food choice results from a dual mode study employing means end chain analysis and a choice experiment abstract in this paper we present the results of a choice experiment ce conducted to examine how the inclusion of a functional ingredient to increase the quantity and effectiveness of fibre affects consumer attitudes towards bread an novel feature of the design of our ce was that it was informed by a means end chain mec to reveal key attributes to be included in the ce in addition we included the dutch eating behaviour questionnaire debq to collect information on all participants underlying eating behaviours we find that bread type is a major factor in determining choice and that the inclusion of a functional ingredient yielded relatively small measures of value we also find that there are differences in willingness to pay wtp between respondent segments and that segment membership is explained by the debq information finally we find that respondents have a stronger preference for a simple health statement compared to or in addition to the implied benefits that result from consuming a functional food product these findings are important in informing both pricing and promotional messages for a functional bread product

understanding heterogeneous preferences in random utility models a latent class approach a finite mixture approach toconditional logit models is developed in whichlatent classes are used to promoteunderstanding of systematic heterogeneity the model is applied to wilderness recreationin which a branded choice experiment involvingchoice of one park from a demand system wasadministered to a sample of recreationists the basis of membership in the classes orsegments in the sample involved attitudinalmeasures of motivations for taking a trip aswell as their stated preferences overwilderness park attributes the econometricanalysis suggested that four classes of peopleexist in the sample using the model toexamine welfare measures of some hypotheticalpolicy changes identified markedly differentwelfare effects than the standard singlesegment model and provided insight into thedifferential impact of alternative policies

optimal shared savings contracts in supply chains linear contracts and double moral hazard in many supply chains consumption of indirect materials sold by a supplier to a customer for use in her production process can be reduced by efforts exerted by either party since traditional supply contracts provide no incentive for the supplier to exert such effort shared savings contracts have been proposed as a way to improve incentives in the channel leading to more efficient effort choices by the two parties such shared savings contracts typically combine a fixed service fee with a variable component based on consumption volume we formalize this situation using the double moral hazard framework in which both parties decide how much effort to exert by trading off the cost of their effort against the benefits that they will obtain from reduced consumption we also extend the double moral hazard framework to analyze a broader class of cost of effort functions than considered so far including the linear cost of effort functions commonly found in practice we show that the supplier can still always induce the optimal second best equilibrium with a linear shared savings contract under this broader class of functions however the behavior of the optimal contract as a function of the problem parameters becomes more complex we illustrate how small changes in the problem parameters can turn profits from being a well behaved to a poorly behaved function of the contract and provide some theoretical characterization of this phenomenon the practical significance of this is that simple linear contracts are sufficient in many double moral hazard contexts even for the broader class of functions we consider but care must be taken in selecting the optimal contract parameters

optimal joint pricing and lot sizing with fixed and variable capacity this paper examines previously unexplored fixed and variable capacity problems of jointly determining an item s price and lot size for a profit maximizing firm facing constant but price dependent demands over a planning horizon we apply geometric programming to these constrained nonlinear maximization problems with nonconcave objective functions and obtain global optimal solutions using kuhn tucker condition marginal and sensitivity analyses we investigate model interactions provide managerial implications on the optimal capacity decisions and explore the postoptimal behavior of the price lot size and capacity expansion and reduction size some findings cast interesting insights different from previous just in time management studies without pricing consideration

the generalized multinomial logit model accounting for scale and coefficient heterogeneity the mixed or heterogeneous multinomial logit mixl model has become popular in a number of fields especially marketing health economics and industrial organization in most applications of the model the vector of consumer utility weights on product attributes is assumed to have a multivariate normal mvn distribution in the population thus some consumers care more about some attributes than others and the iia property of multinomial logit mnl is avoided i e segments of consumers will tend to switch among the subset of brands that possess their most valued attributes the mixl model is also appealing because it is relatively easy to estimate recently however some researchers have argued that the mvn is a poor choice for modelling taste heterogeneity they argue that much of the heterogeneity in attribute weights is accounted for by a pure scale effect i e across consumers all attribute weights are scaled up or down in tandem this implies that choice behaviour is simply more random for some consumers than others i e holding attribute coefficients fixed the scale of their error term is greater this leads to a scale heterogeneity mnl model s mnl here we develop a generalized multinomial logit model g mnl that nests s mnl and mixl by estimating the s mnl mixl and g mnl models on 10 data sets we provide evidence on their relative performance we find that models that account for scale heterogeneity i e g mnl or s mnl are preferred to mixl by the bayes and consistent akaike information criteria in all 10 data sets accounting for scale heterogeneity enables one to account for extreme consumers who exhibit nearly lexicographic preferences as well as consumers who exhibit very random behaviour in a sense we formalize below

serial nonparticipation in repeated discrete choice models we consider alternative econometric strategies for addressing serial nonparticipation that is repeated choice of the same alternative or same type of alternative across a series of choice occasions in data typically analyzed within the repeated discrete choice framework single and double hurdle variants of the repeated discrete choice model are developed and applied to choice experiment and multisite seasonal recreation demand data our results suggest that hurdle models can generate significant improvements in statistical fit and qualitatively different policy implications particularly in choice experiment applications where the proper treatment of serial nonparticipation is relatively more ambiguous

optimal sales force diversification and group incentive payments in this research we show that the interaction between territory allocation and sales force compensation two key drivers of sales productivity strongly affects the firm s profitability we analyze an agency theoretic model that jointly considers the degree of negative or positive correlation across territory outcomes differences in territories sales potentials the agency problem with risk averse salespeople and the availability of both own territory compensation elements such as commission and elements dependent on the performance of others such as group commissions or tournaments we find that allocating salespeople to negatively correlated sales territories beneficially diversifies each salesperson s portfolio of sales outcomes when this allocation includes a group commission pay component and can improve profitability even with a decrease in average territory sales performance in a larger sales force a balanced allocation of salespeople coupled with a group commission dominates an imbalanced allocation comparing piece rate compensation with or without a group commission component to tournaments alongside the allocation problem we find that tournaments are favored over piece rate plans when territories are highly positively correlated territory sales potentials are similar and salespeople have a low disutility for effort and are not very risk averse a piece rate plan conversely dominates a tournament when these conditions are reversed

evaluation of salesforce size and productivity through efficient frontier benchmarking the efficient operation of a salesforce is a critical element in the profitability of many firms three factors play key roles the salesforce s size its allocation and its productivity this gives rise to the following questions can salesforce performance be improved by 1 hiring more salespeople 2 allocating them more effectively to the various sales districts and or 3 improving salesperson productivity through better calling patterns in terms of consumers and product line items the practice of most firms and the methodology used in most of the academic literature to address salesforce design and productivity questions is a bottom up approach this approach starts with assessments by each salesperson of the sales and effort corresponding to each customer and prospect in their territory these assessments are then aggregated to the territory district and national levels this paper takes an alternative top down approach it is based on an estimated relationship between district level sales and salesforce size effort and other variables this more macro level decision tool can be used by management in parallel to and as an objective check of the more conventional and more subjective bottom up approach we develop an efficient frontier methodology which allows us to estimate how total district sales respond to salesforce size district potential and competitive activity in the firm s best performing districts the methodology utilized is based on data envelopment analysis dea and yields a benchmark measure of each district s efficient frontier sales sales assuming the district s salesforce allocates its effort as done in the best performing districts based on the estimated response function we discuss the three potential sources of increased profitability closing the inefficiency gap of each of the lower performing districts optimally reallocating the current salesforce to the various districts and changing the current size of the salesforce to its optimal level the inefficiency gap issue is addressed through comparison of the parameter estimates for the best districts obtained through our methodology with those of an average district sales response function obtained using regression analysis this comparison points to an important methodological finding the use of multiple estimation results may lead to an improved understanding of the phenomenon being studied in our case the identification of the likely causes of district productivity inefficiencies the latter two sources of increased profitability salesforce reallocation and changes in the current salesforce size are addressed analytically given the district level efficient frontier sales response function the proposed top down procedure using the efficient frontier methodology and the insights it provides are examined by evaluating the operations of two different salesforces one selling manufacturing equipment and the other business equipment in both cases regression based analysis would have resulted in a declaration that the status quo was close to optimal while the frontier based analysis pointed out that strong gains were possible in certain districts in particular for both firms the greatest increases in profit are obtained through improved salesforce efficiency in the lower performing districts not through salesforce size or district allocation adjustments at the more micro level a comparison of the frontier and regression parameters made it possible to identify which specific changes in the daily operations of the salesforces would allow the realization of these potential productivity gains in our two cases this could be obtained through more emphasis on pursuing prospective accounts

an economic evaluation of the environmental benefits from pesticide reduction abstract previous studies on the environmental impacts of pesticide use have tended to focus either on measuring damages through changes in relative risks to various environmental categories or examining the trade off between pesticide use levels and abatement costs this study uses the physical risk assessment approach combined with contingent valuation survey results on consumers willingness to reduce pesticide risk the reduction in external costs associated with the changes in pesticide use in ontario agriculture between 1983 and 1998 is us 188 per household the environmental benefits are largely due to the reduction in the level of high and moderate risk pesticides

coordination of internal supply chains in vertically integrated high tech manufacturing organizations htmos abstract this paper uses economic mechanisms to coordinate supply chains within high tech manufacturing organizations htmos it models the one shot initial production and allocation decisions involved in the production and marketing of new technologies these decisions are driven by the economic objectives of the firm and of the employees with private information the experts it analyzes and compares the efficiency of three coordination policies centralized command and control centralized revelation and decentralized revelation it shows that decentralized policies introduce an additional cost and it proposes rules of thumb for coordinating supply chains within firms that use many experts

target pricing demand side versus supply side approaches abstract the practice of target pricing has been a key factor in the success of japanese manufacturers in the more commonly known demand side approach the target price for the supplier equals the manufacturer s market price less a percent margin for the manufacturer but no cost improvement expenses are shared in the supply side approach cost improvement expenses are shared and the target price equals the supplier s cost plus a percent margin for the supplier using a general oligopoly and cournot duopoly models we characterize the equilibrium and optimal policy for each approach under various conditions we find that sharing cost reduction expenses allows the manufacturer using the supply side approach to attain competitive advantage in the form of increased market share and higher profit particularly in industrial conditions where margins are thin and price sensitivities are high

leadtime reduction in a q r inventory system an agency perspective abstract we examine the problem of designing and implementing a continuous review q r inventory system from an agency perspective in which the agent s effort influences the item s replenishment leadtime our results are as follows if the agent is risk neutral a linear or quadratic contract achieves first best for a risk averse agent with an exponential utility function assuming a normal leadtime distribution we determine the optimal linear contract extensive numerical experiments suggest that ignoring the possible influence of the agent on the replenishment leadtime can be costly but that the cost penalty of ignoring agency can be significantly reduced by a simple contract

managing channel profits a channel of distribution consists of different channel members each having his own decision variables however each channel member s decisions do affect the other channel members profits and as a consequence actions a lack of coordination of these decisions can lead to undesirable consequences for example in the simple manufacturer retailer consumer channel uncoordinated and independent channel members decisions over margins result in a higher price paid by the consumer than if those decisions were coordinated in addition the ensuing suboptimal volume leads to lower profits for both the manufacturer and the retailer this paper explores the problems inherent in channel coordination we address the following questions what is the effect of channel coordination what causes a lack of coordination in the channel how difficult is it to achieve channel coordination what mechanisms exist which can achieve channel coordination what are the strengths and weaknesses of these mechanism what is the role of nonprice variables e g manufacturer advertising retailer shelf space in coordination does the lack of coordination affect normative implications from in store experimentation can quantity discounts be a coordination mechanism are some marketing practices actually disguised quantity discounts we review the literature and present a simple formulation illustrating the roots of the coordination problem we then derive the form of the quantity discount schedule that results in optimum channel profits this article was originally published in marketing science volume 2 issue 3 pages 239 272 in 1983

the timing of antitrust effects on pricing this paper extends recent results suggesting a deterrent effect of antitrust cases on price cost margins of firms involved in a sample of 288 firms a negative effect of price fixing indictments on margins is found an effect which erodes over time some weak support is given for the view that a deterrent effect is reduced if a conviction is not obtained finally an attempt to examine the response of firms to stages of a case suggests that the bulk of the antitrust effect on pricing may occur at the onset of investigation prior to actual filing of the case

modeling response to advertising and pricing changes for v 8 cocktail vegetable juice this paper is based on a series of studies undertaken for v 8 cocktail vegetable juice over a five year period the studies were a consequence of management questions regarding the effectiveness of a new advertising campaign the best media mix for this campaign and the apparent wear out of the advertising copy the studies included controlled experimentation estimation of advertising response functions and exploration of price sensitivity following major price increases by v 8 it was found that the short term response to advertising was s shaped and that the new creative approach rather than expenditure levels alone accounted for by far the largest component of the impact of advertising on sales it was also found that for a short period following the major price increases v 8 became extremely price sensitive however after about six months the marginal impact of price returned to historical levels the application of results at campbell soup company their relationship to the literature and their implications for both researchers and practitioners are discussed

hurdle and latent class approaches to serial non participation in choice models in repeated choice modelling studies it is often the case that individuals always select the status quo option although this pattern may reflect considered choices they may also be the result of alternative decisions about whether to participate in the choice process at all alternative methods of dealing with this behaviour each with associated implications for estimates of economic values are presented in particular we consider the alternative strategies of excluding such individuals from the data using hurdle models to explicitly model this group and propose the use of latent class models to endogenously allow for different preference structures an advantage of the latent class approach is that the form of the non participation need not be defined in advance these approaches are considered using uk choice experiment data on food choices where the attributes include genetic modification of food the latent class approach reveals the presence of two forms of non participation in the data

an empirical analysis of sales force compensation plans among the array of direct and indirect methods of motivation and control available to the sales manager is sales force compensation in this article the authors summarize theoretical predictions from the economics marketing finance and accounting literatures on the structure of optimal sales force compensation plans guided by these insights they then construct empirical models to quantify the effect of various sales force factors firm and product factors and market factors on compensation using data from 286 firms in 39 industries the authors examine determinants of incentive components and total pay and the optimal horizon for incentive pay copyright 1992 by university of chicago press

on the role of commitment in a principal agent relationship with an informed principal abstract in many circumstances a principal who has private information when contracting with an agent may perform some further action simultaneously with or after the agent s choice of an action we analyze such a principal agent relationship with an informed principal as a noncooperative game and distinguish two extensive form games first the principal can commit to his subsequent action at the time of contracting second the principal s announcement for his action is not binding at the time of performance we show that commitment by the principal leads to separation and no commitment leads to pooling journal of economic literatureclassification numbers c72 d82

price theory and the role of marketing science professor rao provides a comprehensive review of pricing research in marketing science i will not repeat the details here save to say that the review indicates a diversity of pricing research within the developing field of marketing science professor rao s review and the other papers in this issue from the second rochester conference on the interface of economics and marketing science provide us with the opportunity to reflect on the continuing joint evolution of our two disciplines as a marketing scientist who has found economic models and concepts useful in addressing marketing issues let me comment on these evolutions from a marketing science perspective however as i portray these evolutions in the extreme i note that the boundaries are fluid with much overlap and merging of ideas and issues differences are in degree not in fundamental philosophy in the extreme price theory in economics deals with how markets behave while price theory in marketing science deals with how managers should act it is true that one must understand how managers behave in order to model market behavior and that one must understand how markets behave in order to advise managers the difference is not in the comprehensiveness of the analyses but in the emphasis a typical economic analysis will simplify the model of the manager s task in order to study the essential forces of the market in contrast the typical marketing science analysis will simplify the model of the market mechanism in order to study the essential profit impacts of the actions by the marketing manager i will comment more on these simplifications later economics is a mature science with roots in the eighteenth century when adam smith 1776 observed the english marketplace and formulated his famous invisible hand theory since then the field has evolved in many rich and varied ways a myriad of researchers has

the deterrent effect of antitrust enforcement in this paper we formulate and test a model of collusive pricing in the presence of antitrust enforcement we show that a cartel s optimal price is likely to be neither the competitive price nor the price that the cartel would set in the absence of antitrust enforcement but rather an intermediate price that depends on the levels of antitrust enforcement efforts and penalties our empirical results reveal that increasing antitrust enforcement in the presence of a credible threat of large damage awards has the deterrent effect of reducing mark ups in the bread industry

marketing production decisions in an industrial channel of distribution this paper presents a model that considers the interface between marketing and production decisions in a channel of distribution of industrial goods comprised of a manufacturer and a distributor the key issue investigated is the nature of the coordination within the channel in light of an unstable pattern of seasonal demand the investigation which focuses on dynamic issues considers production activities such as product delivery and inventory policy and their link to marketing strategies such as pricing policies the focus here is on the dynamic nature of the coordinational aspects of the various policies for example the following questions are addressed what is the distributor s pricing strategy throughout the season what is the nature of the contractual price in the channel under what conditions should the distributor carry no inventory throughout the seasonal period under what conditions should the manufacturer carry no inventory what is the impact of the seasonal parameters and differing h

valuing environmental and health risk in agriculture a choice experiment approach to pesticides in italy abstract the widespread use of pesticides in agriculture shows a complex ramification of multiple negative externalities ranging from food safety related effects to the deterioration of farmland ecosystems recent research has demonstrated that the assessment of the economic implications of such negative processes is fraught with many uncertainties this paper presents the results of an empirical study recently conducted in northern italy aimed at estimating the economic value of reducing the wide ranging impacts of pesticide use by deploying a choice experiment approach the experimental design provides a meaningful tool to assign monetary values to the negative environmental effects associated with agrochemicals use in this connection the paper addresses in particular the reduction of farmland biodiversity groundwater contamination and harm to human health the resulting estimates confirm that on average respondents demonstrate a substantial willingness to pay a premium for agricultural goods in particular foodstuffs produced in environmentally benign ways

optimal monitoring policies in agencies this article considers a principal agent problem in which the principal has access to a costly monitoring technology that can be used to acquire additional information about the agent s actions subsequent to observing the agent s output although randomized monitoring policies are feasible we show that in a variety of contexts optimal monitoring policies are deterministic and lower tailed that is there exists some critical level of output such that further investigation of the agent s actions occurs if and only if output falls below this critical level

an investigation of the equal commission rate policy for a multi product salesforce for a multi product sales force the policy of paying commissions as an equal percentage of realized gross margins is shown to be in general nonoptimal from the firm s profit maximization point of view for a homogeneous salesforce the nonoptimality results from the fact that earlier research while taking into account the effect of commission rates on a salesperson s allocations of total time to the multiple products has not incorporated the effect of commission rates on salesperson s total selling time resulting from his her trading off income vs total time to maximize utility the equal commission rate policy is however optimal for the cases of i salesperson with a fixed total selling time and a minimum income requirement and ii fair income salesperson whose total selling time is merely a function of income and not based on rate of change of income as in the utility maximization case if the salesforce is heterogeneous e g different salespersons have differing sales responses to selling time this makes the equal commission rate policy to be in general nonoptimal even for the restrictive cases i and ii it is suggested that the commission rates be set higher for products with greater elasticities relating quantities sold to selling times the common practice of paying commissions as a percentage of total dollar sales rather than gross margins is shown to be optimal under certain assumptions

model selection for the mixed logit with bayesian estimation in this paper the mixed logit ml using bayesian methods was employed to examine willingness to pay wtp to consume bread produced with reduced levels of pesticides so as to ameliorate environmental quality from data generated by a choice experiment model comparison used the marginal likelihood which is preferable for bayesian model comparison and testing models containing constant and random parameters for a number of distributions were considered along with models in preference space and wtp space as well as those allowing for misreporting we found strong support for the ml estimated in wtp space little support for fixing the price coefficient a common practice advocated and adopted in the environmental economics literature and weak evidence for misreporting

do protest responses to a contingent valuation question and a choice experiment differ it is suggested that the number of protest responses in stated preference surveys depends inter alia on the valuation method used choice experiments ce are said to generate a lower number of protest responses than contingent valuation cv however no comparison of both methods with respect to protest responses has been conducted to date we used both ce and cv in a survey on forest biodiversity in two german regions protest beliefs were measured for all respondents irrespective of whether they were willing to pay or not the results show no clear pattern of differences between ce and cv regarding protest beliefs and protest responses using an attitude scale based on respondents protest beliefs we see a significant negative effect of this attitude on willingness to pay in both methods however in one of the two study regions the effect is weaker in ce than in cv

designing incentive systems for truthful forecast information sharing within a firm we consider a firm where the sales division sales is responsible for demand forecasting and the operations division operations is responsible for ordering sales has better information about the demand than operations and sends a nonbinding demand forecast to operations to incentivize truthful information sharing we include a forecast error penalty in the incentive system of sales besides monetary payoffs we also add behavioral factors to the utility function of sales we model the setting as a signaling game and derive the pareto dominant separating equilibria of the game in laboratory experiments we observe human behavior that is in line with the predictions of the behavioral model but deviates substantially from expected payoff maximizing behavior we use the behavioral model to design incentive systems for truthful information sharing and validate the approach in an experiment with out of sample treatments and out of sample subjects we conduct additional experiments to provide further robus

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

a data envelopment analytic model for assessing the relative efficiency of the selling function abstract this paper presents a data envelopment analytic model for assessing the relative efficieny of sales units that simultaneously incorporates multiple sales outcomes controllable and uncontrollable resources and environmental factors the model enables comparisons among a reference set of sales units engaged in selling the same product service by deriving a single summary measure of relative sales efficiency in addition it provides insights into modifications that are necessary in order to enhance relative efficiency of an individual sales unit conditions when the sales unit has additional control over resources are explored and the effects on relative efficiency are examined an illustration of the model in the context of sales units from a sample of insurance companies demonstrates the critical features of the model

costa contribution optimizing sales territory alignment the alignment of sales territories has a considerable impact on profit and represents a major problem in salesforce management practitioners usually apply the balancing approach this approach balances territories as well as possible with respect to one or more attributes such as potential or workload unfortunately this approach does not necessarily guarantee maximizing profit contribution thus it does not provide an evaluation of the profit implications of an alignment proposal in comparison with the existing one in consequence several authors proposed nonlinear integer optimization models in the 1970s these models attempted to maximize profit directly by considering the problems of allocating selling time calling plus travel time across accounts as well as of assigning accounts to territories simultaneously however these models turned out to be too complex to be solvable therefore the authors have either approximated the problem or proposed the application of heuristic solution procedures on the basis of the suboptimal principle of equating marginal profit of selling time across territories to overcome these limitations we propose a new approach costa an acronym for contribution optimizing sales territory alignment in contrast to previously suggested profit maximizing approaches costa operates with sales response functions of any given concave form at thelevel of sales coverage units scus that cover a group of geographically demarcated individual accounts thus costa works with sales response functions at a more aggregated level that requires less data than other profit maximization approaches costa models sales as a function of selling time which includes calling time as well as travel time assuming a constant ratio of travel to calling time in addition the formulation of the model shows that an optimal solution requires only equal marginal profits of selling time across sales coverage units per territory but not across scus of different territories basically costa consists of an allocation model and an assignment model both of which are considered simultaneously the allocation model optimally allocates the available selling time of a salesperson across the scus of his or her territory whereas the assignment model assigns the scus to territories thus costa predicts the corresponding profit contribution of every possible alignment solution which enables one to perform what if analyses the applicability of the model is supported by the development of a powerful heuristic solution procedure a simulation study showed that costa provided solutions that are on average as close as 0 195 to an upper bound on the optimal solution the proposed heuristic solution procedure enables one to solve large territory alignment problems because the computing time increases only quadratically with the number of scus and proportionally to the square root of the number of salespersons in principle we also show how costa might be expanded to solve the salesforce sizing as well as the salespersons location problem the usefulness of costa is illustrated by an application the results of this application indicated substantial profit improvements and also outlined the weaknesses of almost balanced territories it is quite apparent that balancing is only possible at the expense of profit improvements and also does not lead to equal income opportunities for the salespersons this aspect should be dealt with separately from territory considerations by using territory specific quotas and linking variable payment to the achievement of these quotas furthermore the superiority of costa turned out to be stable in a simulation study on the effect of misspecified sales response functions costa is of interest to researchers as well as practitioners in the salesforce area it aims to revive the stream of research in the 1970s that already proposed sales territory alignment models aimed at maximizing profit such profit maximizing models are theoretically more appealing than approaches that strive to balance one or several attributes such as potential or workload costa s main advantage over previous profit maximizing approaches is that it is less complex consequently costa demands less data so that even large problems can be solved close to optimality within reasonable computing times

salesforce compensation plans in environments with asymmetric information in this paper we present a theory of salesforce compensation plans to provide insights into why it may be advantageous for a profit maximizing firm to offer members of its salesforce the opportunity to choose from a menu of compensation plans although such contractual arrangements are not commonly used in the industry they have been introduced and implemented by firms such as ibm and st regis paper as in our previous work on salesforce compensation plans basu lal srinivasan and staelin basu a k r lal v srinivasan r staelin 1985 salesforce compensation plans an agency theoretic perspective marketing sci 4 fall 267 291 we use an agency theory framework in this paper we relax the assumptions of information symmetry and salesforce homogeneity and show the conditions under which it is optimal to offer a menu of compensation plans we also show that even when these assumptions are relaxed there are situations where offering a single plan characterized by basu lal srinivasan and staelin basu a k r lal v srinivasan r staelin 1985 salesforce compensation plans an agency theoretic perspective marketing sci 4 fall 267 291 is still optimal insights gained from the analyses are discussed in the context of an existing compensation scheme

optimization models for salesforce compensation abstract this paper reviews models which address the design of optimal salesforce compensation schemes the discussion starts with agency theoretic models that are able to derive the optimal form for a compensation scheme under assumptions regarding the degree of information asymmetry and heterogeneity within the salesforce for the four resulting extreme cases models are presented that allow for the determination of optimal parameter values for specific compensation schemes such as fixed salary plus commission bonus for quota achievement and menus of plans finally there follows an examination of approaches through which commission rates or bonuses can be optimally differentiated such that the salespersons allocate their selling time in their own and at the same time in the firm s best interest all of these models are reviewed in particular with respect to their applicability in practice

should all choices count using the cut offs approach to edit responses in a choice experiment should we give equal weight to all responses in a choice experiment previous choice modelling papers have considered the issue of the internal consistency of choices such as the extent to which strictly dominated options are chosen in this paper a different focus is employed namely the extent to which people choose options which violate their stated upper or lower limits for the acceptable levels for individual attributes since hypothetical over statement of wtp has been a focus in stated preference studies we concentrate on violations of stated upper limits of wtp and explore the effects of editing such choices using a variable censoring rule and alternative approaches to re classifying choices the empirical case study is a choice experiment on eco tourists in rwanda our main conclusion is that the suggested approach offers a useful way of imposing consistency on choices and that editing choices in this manner has an appreciable impact on estimated willingness to pay however issues remain with regard to explaining why people apparently violate their stated maximum willingness to pay

strategic and deterrent pricing responses to antitrust investigations abstract this paper examines the issue of the effects of antitrust on pricing through two empirical studies the first analyzes time series of prices in five industries involved in antitrust cases to determine whether the various stages of the antitrust process influenced pricing behavior some evidence of a deterrent effect is found with real prices lower than their pre investigation level following the conclusion of the case a major part of the pricing reaction occurs prior to the filing of formal charges the second study provides additional evidence of the existence of such a strategic reaction to the onset of investigation through an examination of prices in 23 industries investigated but not charged with price fixing

the salesperson as outside agent or employee a transaction cost analysis this descriptive study explores the reasons for integration of the personal selling function i e the use of employee direct salespeople rather than manufacturers representatives reps a hypothesized model is developed based on both transaction cost analysis and the sales force management literature data from 13 electronic component manufacturers covering 159 u s sales districts are used to estimate a logistic model of the probability of going direct in a given district results are shown to be stable across specification and estimation methods and to fit the data well the transaction cost model is generally supported the principal finding is that the greater the difficulty of evaluating a salesperson s performance the more likely the firm to substitute surveillance for commission as a control mechanism i e to use a direct sales force among other findings direct sales forces are also associated with complex hard to learn product lines and with districts that demand considerable nonselling activities several factors prove unrelated including company size the amount of travel a district requires and the importance of key accounts this article was originally published in marketing science volume 4 issue 3 pages 234 254 in 1985

structuring a multiproduct sales quota bonus plan for a heterogeneous sales force a practical model based approach this paper presents an agency theoretic model based approach that assists sales managers in determining the profit maximizing structure of a common multiproduct sales quota bonus plan for a geographically specialized heterogeneous sales force operating in a repetitive buying environment this approach involves estimating each salesperson s utility function for income and effort and using these models to predict individual sales achievements and the associated aggregate profit for the firm under a specified plan the utility function estimation is based on the salesperson s own preference rank ordering of alternative sales quota bonus plans once these functions have been estimated they are incorporated in a mathematical programming model that the sales manager can use to determine the best plan the authors demonstrate the approach in the context of a case involving the design of a two product sales quota bonus plan for a set of salespeople at a pharmaceutical products firm

information sharing in a long term supply chain relationship the role of customer review strategy in this paper we study the practice of forecast sharing and supply chain coordination with a game theoretical model we find that in a one shot version of the game forecasts are not shared truthf

rejoinder natural monopoly and the bell system response to charnes cooper and sueyoshi our study of the bell system cost function shows that it is possible to reject the hypothesis that at t was a natural monopoly our study is based on a regression analysis of a translog cost function estimated on 1947 1977 data charnes cooper and sueyoshi charnes a w w cooper t sueyoshi 1988 a goal programming constrained regression review of the bell system breakup management sci 34 1 26 claim that they reverse our conclusion when they use goal programming estimators of a translog cost function estimated on exactly the same data that we use this claim is false there is no basis for comparing our estimates with their estimates because they in fact use different data than we use and estimate a different cost function than we estimate moreover when goal programming estimates and regression estimates based on the same data and similar cost function specifications are compared they yield similar estimates and produce the same inference about natural monopoly

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

personal selling elasticities a meta analysis abstract this article presents a meta analysis of prior econometric estimates of personal selling elasticity that is the ratio of the percentage change in an objective ratio scaled measure of sales output e g dollar or unit purchases to the corresponding percentage change in an objective ratio scaled measure of personal selling input e g dollar expenditures the authors conduct a meta analysis of 506 personal selling elasticity estimates drawn from analyses of 88 empirical data sets across 75 previous articles they find a mean estimate of current period personal selling elasticity of 34 they also find that elasticity estimates are higher for early life cycle stage offerings higher from studies set in europe than from those set in the united states and smaller in more recent years in addition elasticity estimates are affected significantly by analysts use of relative rather than absolute sales output measures by cross sectional rather than panel data by omission of promotions by lagge

on the equivalence of general and specific control in organizations most principal agent relationships in firms are multidimensional in the presence of multiple tasks and multiple performance signals the contract between principal and agent not only has to motivate the agent but also has to direct the agent to allocate effort among different tasks the value of efforts for a specific task accrues not only through the principal s expected returns but also through its contribution to overall risk and therefore to the risk diversification of the task portfolio hence if the agent is risk averse multitask relationships can be considered as a portfolio problem coupled with incentive constraints we examine the relationship between specific control sc and general control gc for multitask principal agent problems under sc the principal observes the outcome of each individual task and uses this set of information for compensation under gc contracts are based only on the aggregate signal such as cumulative profits of all tasks we describe two sets of multitask problems for which gc and sc are equivalent that is contracts based only on aggregate performance signals impose the same incentives for the agent as a contract that is based on the outcome of each task the first multitask problem is characterized by homogeneous tasks in the second multitask problem all activities are perfect substitutes in the cost function of the agent the equivalence of sc and gc arises since gc provides insurance to the agent and yields the same overall risk premium as specific control moreover gc allows the principal to set the same incentives as sc since the marginal returns from gc are equal to the sum of the marginal returns for each task under sc the results described in this paper can serve as benchmarks where gc and sc are equivalent we show how the equivalence can be relevant for a variety of business situations such as the compensation of sales persons or managers at all hierarchy levels we also discuss the reasons when gc and sc differ suppose for instance that tasks are technologically separable and the precision of the performance of one task is low then the principal is forced under gc to adopt an incentive scheme that implements only a low effort across all tasks since the average precision matters under sc however the principal can tailor the optimal efforts to each task

on manufacturing marketing incentives stereotypically marketing is mainly concerned about satisfying customers and manufacturing is mainly interested in factory efficiency using the principal agent agency paradigm which assumes that the marketing and manufacturing managers of the firm will act in their self interest we seek incentive plans that will induce those managers to act so that the owner of the firm can attain as much as possible of the residual returns one optimal incentive plan can be interpreted as follows the owner subcontracts to pay the manufacturing manager a fixed rate for all capacity he delivers each marketing manager receives all of the returns from his product in turn all managers pay a fixed fee to the owner under this plan the marketing managers will often complain about the stock level decisions even though these levels are announced in advance under a revised plan the owner can eliminate such complaints by delegating the stocking decisions to the respective marketing managers without any loss this plan is interpreted as requiring the owner to make a futures market for manufacturing capacity paying the manufacturing manager the expected marginal value for each unit of capacity delivered receiving the realized marginal value from the marketing managers and losing money on average in the process

protest beliefs in contingent valuation explaining their motivation abstract the definition and treatment of protest responses in contingent valuation cv can have a significant influence on the estimated values of the good in question if these responses are censored in order to understand how protest responses are motivated in a cv about forest biodiversity in germany we used an item battery to identify respondents protest beliefs the items were measured for all respondents irrespective of their willingness to pay wtp in principle then a scale based on these beliefs is taken as a dependent variable of regression analyses in addition to environmental concern we used norms the warm glow of giving and dilemma concern as further explanatory variables the latter focuses on cooperation problems in protecting the environment our results show that protest beliefs are significantly influenced by the explanatory factors furthermore the protest beliefs themselves have a significant effect on the decision to be wtp as well as on the amount of money stated by those who are wtp the censoring of protest responses may therefore be indefensible

an integrated model based approach for sales force structuring this paper analyzes the problem of designing the structure of multiproduct sales forces selling in an environment where purchase decisions are made on a straight rebuy or modified rebuy basis it addresses two key issues pertaining to structure how many sales forces should the firm have and which products should be assigned to each sales force first the key determinants of sales force structure are identified and described next a mathematical programming model is formulated that can aid firms in designing the structure of their multiproduct sales force an application is then described in detail including sales response specification parameter estimation solution procedure and model implementation insights from several of the numerous implementations of the model in the pharmaceutical industry are also summarized

linking advertising and quantity decisions in the single period inventory model abstract the single period problem spp also known as the newsboy or news vendor problem is to find the order quantity which maximizes the expected profit in a single period probabilistic demand framework interest in the spp remains unabated and many extensions to it have been proposed in the last decade an important aspect of the spp is the effect of advertising on sales in this paper we extend the spp to a case in which advertising leads to increases in sales we assume that the mean demand is increasing and concave in advertising expenditure and address three cases of demand variance as a function of advertising expenditure 1 demand has constant variance 2 demand has constant coefficient of variation and 3 demand has an increasing coefficient of variation we deal with two objectives a maximizing the expected profit and b maximizing the probability of achieving a target profit we provide closed or near closed form solutions to the problem under uniform exponential and normal demand distributions we illustrate the results using numerical examples and provide some insights into the effect of advertising

percentage rent contracts between co stores abstract high rental rates and space scarcity in popular retail areas are encouraging retailers to share available space creating co stores co stores with complementary products enjoy a boost in foot traffic thus higher sales when the space is owned by one a common practice for retailers is to engage in a revenue sharing agreement we study the optimal design of a percentage rent contract between two co stores each having his her own random sales dependent on effort levels of both retailers since the effort level exerted by a retailer is often unverifiable it results in a double moral hazard problem we show that a linear percentage rent which is composed of a sales share and a based rent achieves the second best effort levels the landlord may also find it optimal to set a fixed rent by setting the sales share to zero with cobb douglas sales and power disutility of effort functions we obtain closed form expressions for the optimal contract we show that the landlord charges a high sales share for a tenant with low demand externality and a high sales scale the landlord is better off renting out space to a small but high revenue generating retailer rather than one generating larger traffic but with lower sales scale when the landlord s externality potential is low but he is successful in generating sales optimal sales share is low but the base rent is high the percentage rent can increase the landlord profit by up to 13 compared to the conventional fixed rent

multiple lot sizing and value of probabilistic information in production to order of an uncertain size abstract a make to order batch manufacturer knows that an order for items with some particular specifications is forthcoming but does not yet know the exact size of the order due to production lead times work needs to start immediately but some units produced may fail to meet required tolerances that is the yield of each batch is random each new run involves a costly setup and each unit attempted involves material and other variable costs if a subjective probability distribution for the order size can be formed the following related questions arise 1 a what is the optimal run size 2 b when should production stop to answer these questions this paper formulates a new model whose main new feature is the ability to handle uncertain demand within a multiple lot sizing setting it is proved that the optimal policy for this scenario is one of control limit stop if and only if the stock of good units is larger than some critical value a computer program was developed for solving the problem for binomial yields and optimal policies for several examples are reported due to the effort required to form and communicate probabilistic forecasts a common practice is to express a forecast as a single number corresponding perhaps to the mean or median of the unarticulated distribution we compute the extra profit expected from forming and using probabilistic forecasts we also show how to compute the profit s variance for any policy

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

modeling preference heterogeneity in stated choice data an analysis for public goods generated by agriculture stated choice models based on the random utility framework are becoming increasingly popular in the applied economics literature the need to account for respondents preference heterogeneity in such models has motivated researchers in agricultural environmental health and transport economics to apply random parameter logit and latent class models in most of the published literature these models incorporate heterogeneity in preferences through the systematic component of utility an alternative approach is to investigate heterogeneity through the random component of utility and covariance heterogeneity models are one means of doing this in this article we compare these alternative ways of incorporating preference heterogeneity in stated choice models and evaluate the sensitivity of estimated welfare measures to which approach is selected we find that a latent class approach fits our data best but all the models perform well in terms of out of sample predictions finally we discuss what criteria a researcher can use to decide which approach is most appropriate for a given data set

intertemporal efficiency analysis of sales teams of a bank stochastic semi nonparametric approach abstract the primary role of a bank branch is evolving from a service provider towards a sales channel previous branch level studies of sales efficiency consider a static setting of a single time period ignoring the stochastic nature of sales outcomes in this paper we examine efficiency and performance of sales teams in a bank branch network over time taking into account the changing demand and operational conditions as well as random disturbances the intertemporal sales frontier is estimated from the panel of monthly data over the years 2007 2010 using the stochastic semi nonparametric envelopment of data stoned method the efficiency scores of sales teams and the trajectories of performance over time allow managers and the sales force to learn from past events and to develop the managerial and work practices across the network while this study focuses on the case of a specific bank some of the innovative features of our approach are applicable to sales efficiency assessment in other banks and financial institutions as well as other network based sales organizations

a goal programming constrained regression review of the bell system breakup the recently implemented court decision to break up bell american telephone telegraph co to accord with u s anti trust laws represents a highly significant policy decision which is proving to be influential in other countries as well as the u s the telecommunication industry is of such size and importance that even relatively small economies that might be lost with bell s breakup as a natural monopoly could involve substantial welfare losses to consumers and producers studies commissioned by the u s justice department that approached this topic by econometric methods reported that the evidence failed to support the contention that bell was a natural monopoly here a goal programming constrained regression as developed in the management science literature uses the same functional form and the same data but nevertheless reverses the main findings of the econometric studies in every one of the 20 years covered this kind of difference in results obtained by two different methods of analysis poi

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

salesforce compensation theory and managerial implications this paper discusses recent advances in the study of salesforce motivation and compensation special emphasis is given to quantitative approaches from the economics finance and marketing literatures the paper summarizes the findings in this analytical work in the context of some examples of compensation practice in order to illustrate the usefulness of the paradigm for the evaluation and setting of compensation systems we consider some major issues in setting compensation such as the firm s own objective the salesperson s objective and the nature of the sales response function variations in these factors imply significant variation in optimal compensation policy where optimal takes into account the components in the plan the parameter levels of the components and whether or not a menu of such plans should be made available to the salesforce by highlighting the results in the literature in light of some relevant compensation examples we show the applicability of theory to the practical concerns of salesforce management we close with a summary of these insights and directions for future research in the area

supply chain choice on the internet internet companies extensively use the practice of drop shipping where the wholesaler stocks and owns the inventory and ships products directly to customers at retailers request under the drop shipping arrangement the supply chain benefits from risk pooling because the inventory for multiple retailers is stocked at the same location the wholesalers another more traditional channel alternative on the internet is one in which retailers stock and own the inventory these two supply chain structures which predominate on the internet result in different inventory risk allocation stocking decisions and profits for channel members moreover the two channel alternatives can be combined into a dual strategy whereby the retailer uses local inventory as a primary source and relies on drop shipping as a backup we model the dual strategy as a noncooperative game among the retailers and the wholesaler analyze it and obtain insights into the structural properties of the equilibrium solution to facilitate development of recommendations for practicing managers finally we characterize situations in which each of three channels is preferable by specifying appropriate ranges of critical parameters including demand variability the number of retailers in the channel wholesale prices and transportation costs

arm s length relationships we show that lowering the cost of acquisition of information that a principal obtains about the performance of an agent may make it more difficult for the principal to commit to threats hence it will weaken incentives and can therefore be counterproductive this phenomenon is explored in a framework where improving the quality of information makes a commitment not to renegotiate less credible applications to the theory of the firm are briefly explored

preferences of scotch malt whisky consumers for changes in pesticide use and origin of barley abstract in a case study related to scotch malt whisky production this study analyses consumers perceptions and preferences regarding two aspects that have emerged in the debate on sustainable production and consumption and on environmentally responsible food choice namely i the use of pesticides in agriculture and ii the provenance of food ingredients we carried out a choice experiment to investigate preferences and estimate willingness to pay of scotch malt whisky consumers for pesticide use restrictions and the potential impact on the production of one of its essential ingredients barley using latent class models we find that about half of the respondents are non demanders with respect to both attributes and only a third of the sample population are willing to pay for further pesticide restrictions demand for more environmentally responsible production of scotch malt whisky is therefore limited indicating that in the case of scotch malt whisky consumers are not likely to be key to driving sustainable production with respect to barley provenance being able to claim a 100 scottish product could be a plausible commercial option for some producers to pursue in a competitive market methodologically the scale adjusted latent class model proved to be successful in uncovering preference heterogeneity and its sources in including non demanders in the analysis and in accounting for differences in scale amongst respondents

assessing salesforce marginal productivity marginal productivity of salesforce excluding checkout clerks in a retail store is difficult to assess an analytical model is presented here explaining this productivity using salesforce workers per hour as the factor of production the explanatory variable and sales transactions per hour as the level of production the explained variable the model incorporates self service transactions controls for various seasonal effects time of day day of the week month of the year and generates solutions for in store salesforce assignment across opening hours and sales points to control for possible endogeneity between the transactions and salesforce size variables instrumental variables are employed in the calibration process the model is calibrated using data from a major retail chain based in latin america both at the storewide level and for groups of individual store departments the results corroborate the existence of diminishing returns to scale for the workers per hour factor and a significant l

dynamic business share allocation in a supply chain with competing suppliers this paper studies a repeated game between a manufacturer and two competing suppliers with imperfect monitoring we present a principal agent model for managing long term supplier relationships using a unique form of measurement and incentive scheme we measure a supplier s overall performance with a rating equivalent to its continuation utility the expected total discounted utility of its future payoffs and incentivize supplier effort with larger allocations of future business we obtain the vector of the two suppliers ratings as the state of a markov decision process and we solve an infinite horizon contracting problem in which the manufacturer allocates business volume between the two suppliers and updates their ratings dynamically based on their current ratings and the current performance outcome our contributions are both theoretical and managerial we propose a repeated principal agent model with a novel incentive scheme to tackle a common but challenging incentive problem in a multiperiod s

compensation plans for single and multi product salesforces an application of the holmstrom milgrom model the agency theory approach to understanding salesforce compensation plans is modified to incorporate the intratemporal nature of the salesperson s effort rate decision i e the decision about the effort rate at any given point in time potentially depends upon the sales performance up to that point in time in the accounting period under the assumptions considered in this paper holmstrom and milgrom 1987 have shown that the optimal compensation plan is linear in total sales over the accounting period the comparative statics results obtained here corroborate most of the corresponding results in the salesforce compensation literature moreover we derive many additional results not available in the literature it is demonstrated that the commission income as a fraction of total compensation goes up with an increase in the effectiveness of the sales effort or an increase in base sales on the other hand the salary component of the total compensation goes up with increases in uncertainty absolute risk