nonlinear pricing to produce information we investigate the firm s dynamic nonlinear pricing problem when facing consumers whose tastes vary according to a scalar index we relax the standard assumption that the firm knows the distribution of this index in general the firm should determine its marginal price schedule as if it were myopic and produce information by lowering the price schedule bunching consumers at positive purchase levels should be avoided as a special case we also consider a market characterized by homogeneous consumers with a static but unknown demand curve we show that when there are repeat purchases the forward looking firm should tend towards penetration pricing otherwise its strategy should tend towards skimming we extend our insights to more general settings and discuss implications for pricing product lines

inventory and sales effort management under unobservable lost sales a retailer needs to make decisions regarding how much to order and how much sales effort to exert in an environment with uncertain demand one intrinsic complexity in a typical retail environment is caused by the fact that the retailer can obtain information about demand only based on sales as demand itself is unobservable taking a bayesian approach lariviere and porteus 1999 show that in such a setting a retailer should stock more to increase the probability of an exact demand observation in this article we extend their work by allowing the retailer to control both the stocking quantity and sales effort which can be used to affect demand we show that their insights with respect to information stalking carry over to this setting in addition our model allows gaining a better understanding of optimal sales effort strategies we find that demand management has a dual role in supporting information gathering while at the beginning of a product life cycle it is optimal to support learning effects by sharply reducing sales effort at later stages of the product life cycle an aggressive strategy of increased promotional activities can be used to harvest the information gathered in earlier periods

make to order or make to stock model and application some firms make all their products to order while others make them to stock there are a number of firms that maintain a middle ground where some items are made to stock and others are made to order this paper was motivated by a consumer product company faced with the decision about which items to make to stock and which ones to make to order and the inventory and production policy for the make to stock items the production environment is characterized by multiple items setup times between the production of consecutive items limited capacity and congestion effects in such an environment making an item to order reduces inventory costs for that item but might increase the lot size and inventory costs for the items made to stock also lead times increase because of congestion effects resulting in higher safety stocks for make to stock items and lower service levels for make to order items thus leading to a complex trade off we develop a nonlinear integer programming formulation of the problem we present an efficient heuristic to solve the problem which was motivated by key results for a special case of the problem without congestion effects that can be solved optimally we also develop a lower bound to evaluate the performance of the heuristic a computational study indicates that the heuristic performs well we discuss the application of the model in a large firm and the resulting insights we also provide insights into the impact of various problem parameters on the make to order versus make to stock decisions using a computational study in particular we find that the average number of setups of an item selected for make to stock production is always less than half the average number of setups of the item if it were to be made to order also factors other than an item s demand such as its setup time processing time and unit holding cost impact the make to order versus make to stock decision

integrated multi item production inventory systems abstract we study an integrated multi item production inventory system with stochastic demands and capacitated production the problem is to find the base stock levels which minimize expected inventory costs per unit time for an infinite time horizon when unit manufacturing times are deterministic or exponentially distributed we derive analytical expressions that lead to the optimal base stock levels our results provide several implications about the interaction of inventories capacity utilization and variation in the production environment

the permissibility of nudging for sustainable energy consumption abstract nudges modify decision frameworks in order to steer people s choices in particular directions modifying energy consumption choices through nudging has shown significant promise for promoting sustainable consumption behaviors however policy makers have been reluctant to embrace nudges due to concerns over potential ethical objections this paper argues that the major ethical objections to nudging are not ultimately convincing when applied to energy production and consumption the most common ethical objections claim that nudging is paternalistic and reduces human autonomy it is argued here that energy production and consumption are massively architectured which means that they are strongly influenced by factors external to individuals the infrastructure and framework for producing and consuming energy is largely determined prior to human decision making as a result it is not clear how nudging for sustainable energy consumption could be paternalistic or autonomy reducing ethical objections should thus not be a deterrent for policy makers pursuing nudges for sustainable energy consumption

optimal dynamic scheduling policy for a make to stock production system this paper considers the dynamic scheduling problem of a single server make to stock queue with two products for the case of poisson demands and exponential production times we show that it is optimal to produce the product with the larger b index when it is backordered if the production times are identically distributed the optimal policy can further be characterized by monotone switching curves we also prove that a base stock policy coupled with a switching curve is optimal for some initial inventory levels a simple linear switching rule for determining production priority is proposed and compared with other heuristic policies in a computational experiment

demand inducement and the physician patient relationship the physician patient relationship is a paradigm for any expert client relationship the physician both diagnoses the patient s illness and recommends a treatment this dual role gives the physician incentive to recommend treatments whose costs outweigh their medical benefits these socially inefficient treatments correspond to the notion of physician induced demand the level of inducement chosen by the physician is shown to depend on the price and potential medical benefits of treatment and the relative diagnostic skills of physician and patient this model offers several testable hypotheses some of which are confirmed by related studies

peer effects in the diffusion of solar photovoltaic panels social interaction peer effects are recognized as a potentially important factor in the diffusion of new products in the case of environmentally friendly goods or technologies both marketers and policy makers are interested in the presence of causal peer effects as social spillovers can be used to expedite adoption we provide a methodology for the simple straightforward identification of peer effects with sufficiently rich data avoiding the biases that occur with traditional fixed effects estimation when using the past installed base of consumers in the reference group we study the diffusion of solar photovoltaic panels in california and find that at the average number of owner occupied homes in a zip code an additional installation increases the probability of an adoption in the zip code by 0 78 percentage points our results provide valuable guidance to marketers designing strategies to increase referrals and reduce customer acquisition costs they also provide insights into the diffusion process of environmentally friendly technologies

confidence based optimisation for the newsvendor problem under binomial poisson and exponential demand abstract we introduce a novel strategy to address the issue of demand estimation in single item single period stochastic inventory optimisation problems our strategy analytically combines confidence interval analysis and inventory optimisation we assume that the decision maker is given a set of past demand samples and we employ confidence interval analysis in order to identify a range of candidate order quantities that with prescribed confidence probability includes the real optimal order quantity for the underlying stochastic demand process with unknown stationary parameter s in addition for each candidate order quantity that is identified our approach produces an upper and a lower bound for the associated cost we apply this approach to three demand distributions in the exponential family binomial poisson and exponential for two of these distributions we also discuss the extension to the case of unobserved lost sales numerical examples are presented in which we show how our approach complements existing frequentist e g based on maximum likelihood estimators or bayesian strategies

the competitive newsboy we consider a competitive version of the classical newsboy problem in which a firm must choose an inventory or production level for a perishable good with random demand and the optimal solution is a fractile of the demand distribution and investigate the impact of competition upon industry inventory a splitting rule specifies how initial industry demand is allocated among competing firms and how any excess demand is allocated among firms with remaining inventory we examine the relation between equilibrium inventory levels and the splitting rule and provide conditions under which there is a unique equilibrium our most general result is that if all excess demand is reallocated i e there is perfect substitutability then competition never leads to a decrease in industry inventory

learning experimentation and the optimal output decisions of a competitive firm this paper considers the effect of learning from experience on the output decisions of a perfectly competitive firm faced with the demand uncertainty specifically a bayesian framework for expectations formation and demand forecasting by a perfectly competitive firm is presented focusing the analysis on the determination of optimal sequential output decisions it is shown that through output experimentation the experimenting firm will select a non myopic sequential policy and will tend to overproduce the exact magnitude of the overproduction and the economic value of experimentation are contingent upon model parameters and the length of the planning horizon

the labor illusion how operational transparency increases perceived value aubiquitous feature of even the fastest self service technology transactions is the wait conventional wisdom and operations theory suggest that the longer people wait the less satisfied they become we demonstrate that because of what we term the labor illusion when websites engage in operational transparency by signaling that they are exerting effort people can actually prefer websites with longer waits to those that return instantaneous results even when those results are identical in five experiments that simulate service experiences in the domains of online travel and online dating we demonstrate the impact of the labor illusion on service value perceptions demonstrate that perceptions of service provider effort induce feelings of reciprocity that together mediate the link between operational transparency and increased valuation and explore boundary conditions and alternative explanations this paper was accepted by pradeep chintagunta and preyas desai special issue editors this paper was accepted by pradeep chintagunta and preyas desai special issue editors

multi period inventory games with information update this paper addresses the multi period inventory game of two substitutable products with learning in which the demand distribution form in each period is known but one or more parameters are unknown in advance the retailers update the estimates of the unknown parameters using the historical demand information as the transaction proceeds at each period the retailers check the initial inventories and update the forecasts about their demands first then they place the orders which are delivered immediately finally the demands are realized and satisfied by the available inventories the unsatisfied demand of one retailer switches to another and is satisfied by the other s left inventory unsatisfied demand is lost and the excess inventories incur a holding cost all the information is common knowledge the objectives of the two retailers are to make proper ordering decisions to maximize their total expected discount profits respectively we model the problem as a dynamic bayesian game with multi dimension state space we give the conditions under which the state space can be reduced we prove the existence and uniqueness of nash equilibrium and show that the equilibrium ordering strategy is the base stock policy the computation of the base stock levels can be reduced to a game with one dimension state space moreover for the case with perishable product the computation of the base stock levels can be reduced to the newsboy game

the short run and long run effects of behavioral interventions experimental evidence from energy conservation we document three remarkable features of the opower program in which social comparison based home energy reports are repeatedly mailed to more than six million households nationwide first initial reports cause high frequency action and backsliding but these cycles attenuate over time second if reports are discontinued after two years effects are relatively persistent decaying at 10 20 percent per year third consumers are slow to habituate they continue to respond to repeated treatment even after two years we show that the previous conservative assumptions about post intervention persistence had dramatically understated cost effectiveness and illustrate how empirical estimates can optimize program design jel d12 d83 l94 q41

the price of advice we develop a model of consulting advising where the role of the consultant is to reveal signals to her client that refine the client s original private estimate of the profitability of a project although the client can perfectly observe and evaluate these signals the consultant may only be able to do the same imperfectly or not at all this captures the idea that the expert may not fully understand the impact of her advice on the client we characterize the optimal contract between the consultant and her client it is a menu consisting of pairs of transfers specifying payments between the two parties in case the project is undertaken by the client and in case it is not the main result of the article is that in the optimal mechanism the consultant obtains the same profit as though she could perfectly observe and evaluate the impact of the signals whose release she controls on the client s profit estimate

resource allocation to defensive marketing and manufacturing strategies abstract in this paper we investigate the coordinated use of marketing and manufacturing strategies to formulate a defensive business strategy for an incumbent firm upon market entry while defensive marketing strategies have been researched extensively little has been done on defensive manufacturing strategies and even less on coordinating these two we propose a formulation for the joint formation of a defensive strategy by the marketing and production functions under budget constraint considerations the incumbent firm may allocate its resourcesto advertising and distribution expenditures as well as to manufacturing investments to reduce the unit production cost the incumbent firm has also the option of simply allocating all of its resources purely to advertising and distribution we show that while there exist cases where the optimal reaction to entry involves investments in manufacturing improvements there are also cases where defense is in marketing strategies alone we identify the market conditions that promote such reactions to entry and also provide sensitivity analysis

note the newsvendor model with endogenous demand this paper considers a firm s price and inventory policy when it faces uncertain demand that depends on both price and inventory level the authors extend the classic newsvendor model by assuming that expected utility maximizing consumers choose between visiting the firm and consuming an exogenous outside option the outside option represents the utility the consumer forgoes when she chooses to visit the firm before knowing whether or not the product will be available the authors investigate both the case in which the firm s price is exogenous and the case in which price is chosen optimally the paper makes two contributions first the authors show that the firm holds more inventories provides a higher fill rate attracts more customers and earns higher profits when it internalizes the effect of its inventory on demand second the authors show that in the endogenous price case the firm s two dimensional decision problem can be reduced to two sequential single variable optimizations as a result the endogenous price case is as easy to solve as the exogenous price case

inventory management under market size dynamics we investigate the situation where a customer experiencing an inventory stockout at a retailer potentially leaves the firm s market in classical inventory theory a unit stockout penalty cost has been used as a surrogate to mimic the economic effect of such a departure in this study we explicitly represent this aspect of consumer behavior incorporating the diminishing effect of the consumers leaving the market upon the stochastic demand distribution in a time dynamic context the initial model considers a single firm we allow for consumer forgiveness where customers may flow back to the committed purchasing market from a nonpurchasing latent market the per period decisions include a marketing mix to attract latent and new consumers to the committed market and the setting of inventory levels we establish conditions under which the firm optimally operates a base stock inventory policy the subsequent two models consider a duopoly where the potential market for a firm is now the committed market of

second opinions and price competition inefficiency in the market for expert advice we consider a market in which an expert must exert costly but unobservable effort to identify the service that meets the consumer s need in our model experts offer competing contracts and the consumer may gather multiple opinions we explore the incentives that a competitive sampling of prices and opinions provides for experts to exert effort and find that there is a tension between price competition and the equilibrium effort in particular the equilibrium fails to realize the second best welfare optimum an intervention that limits price competition via price control increases welfare

stock wars inventory competition in a two echelon supply chain with multiple retailers this paper studies the competitive and cooperative selection of inventory policies in a two echelon supply chain with one supplier andn retailers stochastic demand is monitored continuously retailers incur inventory holding and backorder penalty costs the supplier incurs holding costs for its inventory and backorder penalty costs for backorders at the retailers the latter cost reflects the supplier s desire to maintain adequate availability of its product to consumers previous research finds the supply chain cost minimizing reorder point policies the cooperative solution the competitive solution is a nash equilibrium a set of reorder points such that no firm can deviate from the equilibrium and lower its cost it is shown that nash equilibria exist and a method is presented to find all of them in some settings the cooperative solution is a nash equilibrium competition does not necessarily lead to supply chain inefficiency in other settings competition leads to costs that are substantially higher than optimal usually but not always the competitive supply chain carries too little inventory three cooperation strategies are discussed change incentives change equilibrium and change control a set of contracts is provided that changes the firms incentives so that the optimal policy is a nash equilibrium an equilibrium change can improve performance but does not guarantee optimal performance to change control the firms let the supplier choose all reorder points a key component in vendor managed inventory that change leads to optimal supply chain performance

observation bias the impact of demand censoring on newsvendor level and adjustment behavior in an experimental newsvendor setting we investigate three phenomena level behavior the decision maker s average ordering tendency adjustment behavior the tendency to adjust period to period order quantities and observation bias the tendency to let the degree of demand feedback influence order quantities we find that in three of four conditions the portion of mismatch cost that results from adjustment behavior exceeds the portion of mismatch cost caused by level behavior observation bias is studied through censored demand feedback a situation that arguably represents most newsvendor settings when demands are uncensored subjects tend to order below the normative quantity when they face high margin and above the normative quantity when they face low margin but in neither case do they order beyond mean demand the pull to center effect censoring in general leads to lower quantities magnifying the below normative level behavior when they face high margin but partially counterbalancing the above normative level behavior when they face low margin violating the pull to center effect in both cases data as supplemental material are available at http dx doi org 10 1287 mnsc 2013 1825 this paper was accepted by christian terwiesch operations management

statistical learning of service dependent demand in a multiperiod newsvendor setting we study an inventory system wherein a customer may leave the seller s market after experiencing an inventory stockout traditionally researchers and practitioners assume a single penalty cost to model this customer behavior of stockout aversion recently a stream of researchers explicitly model this customer behavior and support the traditional penalty cost approach we enrich this literature by studying the statistical learning of service dependent demand we build and solve four models a baseline model where the seller can observe the demand distribution a second model where the seller cannot observe the demand distribution but statistically learns the demand distribution a third model where the seller can learn or pay to obtain the exact information of the demand distribution and a fourth model where demand in excess of available inventory is lost and unobserved interestingly we find that all four models support the traditional penalty cost approach this result confirms the use of a state independent stockout penalty cost in the presence of demand learning more strikingly the first three models imply the same stockout penalty cost which is larger than the stockout penalty cost implied by the last model

competition and outsourcing with scale economies scale economies are commonplace in operations yet because of analytical challenges relatively little is known about how firms should compete in their presence this paper presents a model of competition between two firms that face scale economies i e each firm s cost per unit of demand is decreasing in demand a general framework is used which incorporates competition between two service providers with price and time sensitive demand a queuing game and competition between two retailers with fixed ordering costs and pricesensitive consumers an economic order quantity game reasonably general conditions are provided under which there exists at most one equilibrium with both firms participating in the market we demonstrate in the context of the queuing game that the lower cost firm in equilibrium may have a higher market share and a higher price an enviable situation we also allow each firm to outsource their production process to a supplier even if the supplier s technology is no better than the firms technology and the supplier is required to establish dedicated capacity so the supplier s scale can be no greater than either firm s scale we show that the firms strictly prefer to outsource we conclude that scale economies provide a strong motivation for outsourcing that has not previously been identified in the literature

on doctors mechanics and computer specialists the economics of credence goods most of us need the services of an expert when our apartment s heating or our washing machine breaks down or when our car starts to make strange noises and for most of us commissioning an expert to solve the problem causes concern this concern does not disappear even after repair and payment of the bill on the contrary one worries about paying for a service that was not provided or receiving some unnecessary treatment this article studies the economics underlying these worries under which conditions do experts have an incentive to exploit the informational problems associated with markets for diagnosis and treatment what types of fraud exist what are the methods and institutions for dealing with these informational problems under which conditions does the market provide incentives to deter fraudulent behavior and what happens if all or some of those conditions are violated

the economics of breakdowns checkups and cures a market in which the owner of a durable good x contracts with an expert for diagnostic and treatment services is studied good x may be in one of three states health disease or failure only experts can determine whether x is healthy or diseased and perform treatment the owner cannot tell whether recommended treatment is really needed this creates an information based demand for health insurance by risk neutral consumers imperfections in the market for spot insurance may give rise to free diagnostic checks strategic procrastination and long term health maintenance agreements

behavioral environmental economics promises and challenges environmental issues provide a rich ground for identifying the existence and consequences of human limitations in this paper we present a growing literature lying at the interface between behavioral and environmental economics this literature identifies alternative solutions to traditional economic instruments in environmental domains that often work imperfectly but it also faces a set of challenges including the difficulty of computing welfare effects and the identification of a robust environmental policy based on context dependent socio psychological effects we illustrate our critical discussion with two behavioral schemes that have been widely implemented green nudges and corporate environmental responsibility

bayes solution to dynamic inventory models under unknown demand distribution this paper considers the periodic review inventory problem for which one or more parameters of the demand distribution are unknown with a known prior distribution chosen from the natural conjugate

incentive effects favor nonconsolidating queues in a service system the principal agent perspective in this paper we study a service network in which an agency is responsible for satisfying a constraint on the expected waiting and service time experienced by customers however the agency does not render the actual service instead it serves to coordinate independently operated facilities the coordinating agency must devise a strategy for allocating compensation and customers to the self interested operators in order to minimize its own costs for a network of two facilities we model the facilities self interested capacity decisions as the solution to a game using this analytical framework we compare two types of customer allocation one from a common queue and one from separate queues our analysis shows that it can be in the best interest of the coordinating agency to adopt a separate queue allocation scheme instead of one based on a common queue although doing so sacrifices risk pooling benefits these can be more than offset by the stronger incentives that are created for the independent facilities

competitive and cooperative inventory policies in a two stage supply chain we investigate a two stage serial supply chain with stationary stochastic demand and fixed transportation times inventory holding costs are charged at each stage and each stage may incur a consumer backorder penalty cost e g the upper stage the supplier may dislike backorders at the lower stage the retailer we consider two games in both the stages independently choose base stock policies to minimize their costs the games differ in how the firms track their inventory levels in one the firms are committed to tracking echelon inventory in the other they track local inventory we compare the policies chosen under this competitive regime to those selected to minimize total supply chain costs i e the optimal solution we show that the games nearly always have a unique nash equilibrium and it differs from the optimal solution hence competition reduces efficiency furthermore the two games equilibria are different so the tracking method influences strategic behavior we show that the system optimal solution can be achieved as a nash equilibrium using simple linear transfer payments the value of cooperation is context specific in some settings competition increases total cost by only a fraction of a percent whereas in other settings the cost increase is enormous we also discuss stackelberg equilibria

consumer information in a market for expert services abstract we present a model of credence goods in which the consumers are heterogenous in terms of the valuation they place for getting a serious problem fixed we introduce consumer information into this framework by assuming that prior to visiting an expert some consumers receive an information signal about whether they have a serious or a minor problem we show that when the fraction of consumers with low willingness to pay is sufficiently high the expert does not cheat any low valuation consumer regardless of their information status but cheats the high valuation consumers those high valuation consumers with bad signals are the most frequent victims of cheating whereas those with good signals are the least likely victims when the fraction of consumers with low willingness to pay is below a certain threshold however the unique equilibrium involves no cheating

the censored newsvendor and the optimal acquisition of information this paper investigates the effect of demand censoring on the optimal policy in newsvendor inventory models with general parametric demand distributions and unknown parameter values we show that the newsvendor problem withobservable lost sales reduces to a sequence of single period problems while the newsvendor problem withunobservable lost sales requires a dynamic analysis using a bayesian markov decision process approach we show that the optimalin ventory level in the presence of censored demand ishigher than would be determined using a bayesian myopic policy we explore the economic rationality for this observation and illustrate it with numerical examples

honesty in a model of strategic information transmission we consider the following simple model of consumer fraud consumers need one of two possible repairs an expensive repair denoted e or an inexpensive repair denoted i the exogenous probability that a consumer needs the more costly remedy is r each consumer is assumed to know r an expert can observe with certainty which of the two repairs is needed and can offer to sell either to the consumer in a simple extension we allow for uncertainty with respect to the expert s observation we assume that selling the expensive remedy to a consumer who needs only the inexpensive one is more profitable than selling the inexpensive one thus h eii h1 iji where h denotes profit and i denotes conditional on needing the profit functions are increasing in the price of the respective repairs for convenience we suppress the dependence of h on prices in our notation we also assume that a consumer prefers to obtain the appropriate repair to the inappropriate one thus u eie u ije and u iii u eii where u is the consumer s payoff lastly we assume that the functions u eje and u e i are decreasing in the price of the expensive repair and that u iie and u iii are decreasing in the price of the inexpensive repair we also assume that u iie is decreasing in the price of the expensive repair since the consumer ultimately buys the expensive repair in this case see below for further assumptions regarding the repairs we are interested in the equilibrium levels of honesty in this model how honest is the expert at the equilibrium do consumers always follow the expert s advice does the level of honesty increase as the interests of the agents become more similar in a sense to be defined below our assumptions are similar to those in the abstract strategic information transmission models of vincent crawford and joel sobel 1982 and jerry green and nancy stokey 1980 we follow the former paper which asks whether the signals sent become less noisy as the agents preferences become more similar despite the similarity of our model to crawford sobel s we arrive at some different conclusions with respect to the expert s honesty vis a vis the agents closeness of interests we explain this in detail in section iii in addition we allow that the expert may be uncertain about the true state of the world we also explicitly model the level of expert honesty which extends crawford sobel the outline of the paper is as follows in section i we provide the details of the model and show that a unique equilibrium exists comparative static results and a simple extension incorporating the assumption of the incompetent expert are given in section ii we draw comparisons with crawfordsobel in section iii in section iv we conclude with a brief summary

on the censored newsvendor and the optimal acquisition of information we have read ding et al 2002 referred to hereafter as dpb with great interest dpb con ains two main results theorem a claims that the myopic inventory level is a lower bound on the optimal inventory level and theo rem b attempts to quantify the marginal expected value of information however there are mistakes in the proof of theorem a the result itself is correct a proof is given in lu et al 2004 furthermore one of the erroneous expressions in dpb s proof leads to an error in the marginal expected value of information in theorem b we now provide more details the equation numbers unless specified otherwise refer to the appendix of dpb available at the operations research home page http or pubs informs org the main error in the proof of theorem a is the follow ing if a x and b x are two functions of the variable jc then the derivative of a x b x with respect to x is d r x m da x db x a x b x b x a x dpb s mistake in essence is to omit the second term more specifically a key step in proving theorem a is inequality 35

revenue management approach to stochastic capacity allocation problem abstract to formulate stochastic capacity allocation problems in a manufacturing system the concept and techniques of revenue management is applied in this research it is assumed the production capacity is stochastic and hence its exact size cannot be forecasted in advance at the time of planning there are two classes of frequent and occasional customers demanding this capacity the price rate as well as the penalty for order cancellation caused by overbooking is different for each class the model is developed mathematically and we propose an analytical solution method the properties of the optimal solution as well as the behavior of objective function are also analyzed the objective function is not concave in general however we prove it is a unimodal function and by taking advantage of this property the optimal solution is determined

credence goods costly diagnosis and subjective evaluation we study contracting between a consumer and an expert the expert can invest in diagnosis to obtain a noisy signal about whether a low cost service is sufficient or whether a high cost treatment is required to solve the consumer s problem this involves moral hazard because diagnosis effort and signals are not observable treatments are contractible but success or failure of the low cost treatment is observed only by the consumer payments can therefore not depend on the objective outcome but only the consumer s report or subjective evaluation a failure of the low cost treatment delays the solution of the consumer s problem by the high cost treatment to a second period we show that the first best solution can always be implemented if the parties discount rate is zero an increase in the discount rate reduces the range of parameter combinations for which the first best can be obtained in an extension we show that the first best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents

when do experts cheat and whom do they target a credence good is a product or service whose usefulness or necessity is better known to the seller than to the buyer this information asymmetry often persists even after the credence good is consumed i propose two new theories of expert cheating suggesting that identifiable heterogeneities among customers can cause expert sellers to defraud their customers according to these theories cheating arises as a substitute for price discrimination and experts cheat selectively for instance experts target high valuation and high cost customers finally selective cheating may damage the communication of useful information from customers to experts and result in inferior services

pricing and lead time decisions in decentralized supply chains this paper studies a decentralized supply chain consisting of a supplier and a retailer facing price and lead time sensitive demands a stackelberg game is constructed to analyze the price and lead time decisions by the supplier as the leader and the retailer as the follower the equilibrium strategies of the two players are obtained using the performance of the corresponding centralized system as a benchmark we show that decentralized decisions in general are inefficient and lead to inferior performance due to the double marginalization effect however further analysis shows that the decision inefficiency is strongly influenced by market and operational factors and if the operational factors are dominating it may not be significant this shows that before pursuing a coordination strategy with retailers a supplier should first improve his or her own internal operations

estimating demand by using sales information inaccuracies encountered abstract demand data is integral to a company s overall information requirement this is particularly true for manufacturers and retailers with regard to capacity production and inventory planning notwithstanding the implicit inaccuracies encountered companies are predisposed to employ sales data as a primary source of information for estimating future demand in this paper by adopting a two product setting we measure inventory cost inaccuracies that arise from using sales data in estimating demand by analyzing these costs we also explore the conditions under which the resulting inaccuracies are either lessened or become acute in this context the determining rule of an induced substitution structure between the two products during stockout occasions is explicitly analyzed we use a newsboy framework in a two product environment wherein one product may be taken as a direct substitute for the other we provide necessary and sufficient optimality conditions and an extensive computational study to illustrate and support our findings and to provide additional insights on the conditions characterizing optimal stocking policies

competition for procurement contracts with service guarantees we consider a market with two suppliers and a set of buyers in search of procurement contracts with one of the suppliers in particular each buyer needs to process a certain volume of work and each supplier s ability to process the customers requests is constrained by a production capacity the procurement contracts include guarantees that the products will be available when needed and the buyers select a supplier based on their service delivery offers the suppliers are modeled as make to stock queues and compete for the buyers business the main objective of this paper is to determine how the procurement contracts are established between buyers and suppliers because each buyer selects a single supplier to establish the sourcing relationship the game fails to have a pure strategy nash equilibrium instead an equilibrium is defined as the limit equilibrium of some discrete action games

the role of inventory in delivery time competition the paper operationalizes the notion of shortage cost by considering the behavior of customers and competing firms and examines the role of inventory in response time competition we start with a single firm production control model in which customers are characterized by their preferences of price quality and delivery time the optimal production inventory policy and the optimal choice between make to order and make to stock operations are determined in simple newsboy like formulas the basic model is then extended to an n firm market game in which firms compete for orders from the aspect of early delivery one could think of this setting as an oligopoly racing market the analysis shows that competition can breed a demand for produce to stock just as other economic phenomena such as economies of scale uncertainty or seasonality can induce make to stock and that delivery time competition increases the buyer s welfare while decreasing the producer s welfare

demand estimation and ordering under censoring stock out timing is almost all you need retailers facing uncertain demand can use observed sales to update demand estimates however such learning is limited by the amount of inventory carried when demand exceeds inventory i e when a stock out event occurs a retailer in general cannot observe actual demand we propose using observations on the timing of sales occurrences in a bayesian fashion to learn about demand and we analyze this learning method for a multiperiod newsvendor setting we find that as previously shown with the use of only stock out event observations the optimal order quantity with timing observations is greater than the optimal order quantity with full demand observations we prove this result using a novel methodology from the statistics literature on comparison of experiments although the optimal over ordering with timing observations tends to be less than that with only stock out event observations in most cases we do observe cases where the opposite is true such cases correspond to high demand uncertainty and low margins where marginal learning from timing observations is significantly higher than using only a stock out event in an extensive numerical study we find that on average and with respect to uncensored demand observations the use of timing observations eliminates 76 1 of the loss in expected profit from using only stock out event observations we show that for poisson and normal demand with unknown mean the proposed learning method is tractable as well as intuitively appealing the information contained in the timing of sales occurrences is fully captured by a single number the timing of stock out we also investigate checkpoint models in which the newsvendor can make observations only at predetermined times in a period and illustrate its convergence to the models with timing and stock out event observations

modeling the role of retail price formats and retailer competition types on production schedule strategy abstract to study the determinants of choice between make to order mto and make to stock mts production scientists have traditionally focused on production specific factors however the choice can be also influenced by marketing specific factors such as the pricing strategy of retailers this paper therefore develops a modeling framework to link the determination of the optimal production strategy of mts mto to the retailing strategy of edlp hilo we characterize an optimal production strategy as one that maximizes total system wide profits in a centralized system we show that the optimum production strategy would depend on whether the manufacturer is delivering to an every day low pricing edlp store or to a high low pricing store hi lo additionally the production plan is demonstrated to be a function of the nature and type of competition in the market in particular we study the duopoly model of competition under both bertrand and stackelberg conjectures

optimal inventory decisions in a multiperiod newsvendor problem with partially observed markovian supply capacities abstract this paper considers a multi period news vendor problem with partially observed supply capacity information which evolves as a markovian process the supply capacity is fully observed by the buyer when the capacity is smaller than the buyer s ordering quantity otherwise the buyer knows that the current period supply capacity is greater than its ordering quantity based on these two observations the buyer updates the future supply capacity forecasting accordingly with a dynamic programming formulation we prove the existence of an optimal ordering policy we also prove that the optimal order quantity is greater than the myopic order quantity

asymmetric consumer learning and inventory competition we develop a model of consumer learning and choice behavior in response to uncertain service in the marketplace learning could be asymmetric that is consumers may associate different weights with positive and negative experiences under this consumer model we characterize the steady state distribution of demand for retailers given that each retailer holds a constant in stock service level we then consider a noncooperative game in steady state between two retailers competing on the basis of their service levels the demand distributions of retailers in this game are modeled using a multiplicative aggregate market share model in which the mean demands are obtained from the steady state results for individual purchases but the model is simplified in other respects for tractability our model yields a unique pure strategy nash equilibrium we show that asymmetry in consumer learning has a significant impact on the optimal service levels market shares and profits of the retailers when retailers have different costs it also determines the extent of competitive advantage enjoyed by the lower cost retailer

pricing production scheduling and delivery time competition this paper studies competition between firms that produce goods or services for customers sensitive to delay time firms compete by setting prices and production rates for each type of customer and by choosing scheduling policies the existence of a competitive equilibrium is proved the competitive equilibrium is well defined whether or not a firm can differentiate between customers based upon physical characteristics because each customer has incentive to truthfully reveal its delay cost further insights are derived in two special cases a unique equilibrium exists for each of the cases in the first case firms are differentiated by cost mean processing time and processing time variability but customers are homogeneous the conclusions include that a faster lower variability and lower cost firm always has a larger market share higher capacity utilization and higher profits however this firm may have higher prices and faster delivery time or lower prices and longer delivery time in the second

a general equilibrium model for industries with price and service competition this paper develops a stochastic general equilibrium inventory model for an oligopoly in which all inventory constraint parameters are endogenously determined we propose several systems of demand processes whose distributions are functions of all retailers prices and all retailers service levels we proceed with the investigation of the equilibrium behavior of infinite horizon models for industries facing this type of generalized competition under demand uncertainty we systematically consider the following three competition scenarios 1 price competition only here we assume that the firms service levels are exogenously chosen but characterize how the price and inventory strategy equilibrium vary with the chosen service levels 2 simultaneous price and service level competition here each of the firms simultaneously chooses a service level and a combined price and inventory strategy 3 two stage competition the firms make their competitive choices sequentially in a first stage all firms simultaneously choose a service level in a second stage the firms simultaneously choose a combined pricing and inventory strategy with full knowledge of the service levels selected by all competitors we show that in all of the above settings a nash equilibrium of infinite horizon stationary strategies exists and that it is of a simple structure provided a nash equilibrium exists in a so called reduced game we pay particular attention to the question of whether a firm can choose its service level on the basis of its own input characteristics i e its cost parameters and demand function only we also investigate under which of the demand models a firm under simultaneous competition responds to a change in the exogenously specified characteristics of the various competitors by either i adjusting its service level and price in the same direction thereby compensating for price increases decreases by offering improved inferior service or ii adjusting them in opposite directions thereby simultaneously offering better or worse prices and service

a supply chain network economic model with time based competition abstract this paper presents an integrated model for time cost competition between supply chains with heterogeneous customers the firms in our model can offer various time options for their production service to time sensitive customers this gives rise of a new concept of time based supply chain which we call t chain to be the basic element in the competition and extends the inter supply chain competition to a new dimension of time assuming the customers are heterogeneous in time cost bi criteria decision making we integrate the discrete choice theory into supply chain network competition and formulate the equilibrium conditions as a multinomial logit based variational inequality problem numerical examples are presented for model illustration and managerial insights such as profit maximization for a firm who participates in this supply chain network

optimal service speeds in a competitive environment this is a study of the economic behavior of vendors of service in competition a simple model with two competing exponential servers and poisson arrivals is considered each server is free to choose his own service rate at a cost per time unit that is strictly convex and increasing there is a fixed reward to a server for each customer that he serves the model is designed to study one specific aspect of competition namely competition in speed of service as a means for capturing a larger market share in order to maximize long run expected profit per time unit a two person strategic game is formulated and its solutions are characterized depending on the revenue per customer served and on the cost of maintaining service rates the following three situations may arise i a unique symmetric strategic nash equilibrium in which expected waiting time is infinite ii a unique symmetric strategic equilibrium in which expected waiting time is finite and iii several nonsymmetric strategic equilibria with infinite expected waiting time an explicit expression for the market share of each server as a function of the service rates of the two servers is also given

adaptive data driven inventory control with censored demand based on kaplan meier estimator using the well known product limit form of the kaplan meier estimator from statistics we propose a new class of nonparametric adaptive data driven policies for stochastic inventory control problems we focus on the distribution free newsvendor model with censored demands the assumption is that the demand distribution is not known and there are only sales data available we study the theoretical performance of the new policies and show that for discrete demand distributions they converge almost surely to the set of optimal solutions computational experiments suggest that the new policies converge for general demand distributions not necessarily discrete and demonstrate that they are significantly more robust than previously known policies as a by product of the theoretical analysis we obtain new results on the asymptotic consistency of the kaplan meier estimator for discrete random variables that extend existing work in statistics to the best of our knowledge this is the first application of the kaplan meier estimator within an adaptive optimization algorithm in particular the first application to stochastic inventory control models we believe that this work will lead to additional applications in other domains

optimal inventory policies under service sensitive demand the service level provided by a retailer influences demand and sales in several ways in the short run sales can fall short of demand when customers experience stockouts and choose not to backorder in the long run demand itself may decline as customers who experience excessive stockouts shift permanently to more reliable sources the traditional approach to determining inventory policies assumes a fixed stockout cost attributable to each stockout occasion in practice stockout costs are difficult to determine at least in part because they reflect the long term loss of demand due to inadequate service in this paper we model the response of long run demand to the service level of the retailer and determine optimal order up to inventory policies in the presence of service sensitive demand we show under what conditions inventory policy is sensitive to both the mean and the variance of long run demand

learning consumer tastes through dynamic assortments how should a firm modify its product assortment over time when learning about consumer tastes in this paper we study dynamic assortment decisions in a horizontally differentiated product category for which consumers diverse tastes can be represented as locations on a hotelling line we presume that the firm knows all possible consumer locations comprising a finite set but does not know their probability distribution we model this problem as a discrete time dynamic program each period the firm chooses an assortment and sets prices to maximize the total expected profit over a finite horizon given its subjective beliefs over consumer tastes the consumers then choose a product from the assortment that maximizes their own utility the firm observes sales which provide censored information on consumer tastes and it updates beliefs in a bayesian fashion there is a recurring trade off between the immediate profits from sales in the current period exploitation and the informational gains to be exploited in all future periods exploration we show that one can partially order assortments based on their information content and that in any given period the optimal assortment cannot be less informative than the myopically optimal assortment this result is akin to the well known stock more result in censored newsvendor problems with the newsvendor learning about demand through sales when lost sales are not observable we demonstrate that it can be optimal for the firm to alternate between exploration and exploitation and even offer assortments that lead to losses in the current period in order to gain information on consumer tastes we also develop a bayesian conjugate model that reduces the state space of the dynamic program and study value of learning using this conjugate model

procuring fast delivery sole sourcing with information asymmetry this paper studies a queuing model in which a buyer sources a good or service from a single supplier chosen from a pool of suppliers the buyer seeks to minimize the sum of her procurement and operating costs the latter of which depends on the suppliers lead time the selected supplier can regulate his lead time but faster lead times are costly although the buyer selects the supplier to source from possibly via an auction and dictates the contractual terms the buyers bargaining power is limited by asymmetric information the buyer only has an estimate of the suppliers costs while the suppliers know their costs precisely we identify a procurement mechanism that minimizes the buyers total cost procurement plus operating this mechanism is not simple it is a numerically derived nonlinear menu of contracts therefore we study several simpler mechanisms e g one that charges a late fee and one that specifies a fixed lead time requirement no menus no nonlinear functions we find that simple mechanisms are nearly optimal generally within 1 of optimal because asymmetric information conveys significant protection to the supplier i e the supplier is able to retain most of the benefit of having a lower cost renegotiation is another concern with the optimal mechanism because it does not minimize the supply chains cost the firms can be both better off if they throw away the contract and start over interestingly we find that the potential gain from renegotiation is relatively small with either the optimal or our simple mechanisms we conclude that our simple mechanisms are quite attractive along all relevant dimensions buyers performance supply chain performance simplicity and robustness to renegotiation

optimal operating policies for multiplant stochastic manufacturing systems in a changing environment this paper addresses the horizontal coordination between production units located in different countries within a supply chain in a changing environment the model incorporates 1 congestion and delay through uncertainties in demand and processing times 2 a changing production cost environment through uncertainty in an environmental state such as the exchange rate and 3 allowing production to stock the main contribution of the paper is to characterize the optimal production policy assuming no switchover cost as a barrier type control policy for a series of models for each plant there is a barrier function defined on the environmental state that gives the total worldwide stock level barrier this plant should be operated if and only if the stock level is below this barrier the authors also show that in a simple setting of two plants in different countries the barrier functions are not always monotone in the exchange rate even when the production costs are the authors present a condition under which the control barriers are shown to be monotone under this condition and with only two plants it is optimal to follow a primary secondary plant policy in which given a fixed environmental state it is optimal to operate both plants when stock is low only the primary plant when stock is moderate and neither when stock is high furthermore the roles of the plants switch as the environmental state passes through the equal production cost state in addition the firm seeks to carry the most stock as a hedge against future environmental state moves when one plant is significantly cheaper than the other the firm seeks to carry the least stock when both plants are equally costly to operate

credence goods experts and risk aversion abstract the existing literature on credence goods and expert services has overlooked the importance of risk aversion in this paper we extend a standard expert model of credence goods with verifiable service quality by considering risk averse consumers our results show that the presence of risk aversion reduces the expert s incentive to invest in diagnosis and may thus lead to consumers mistreatment

stalking information bayesian inventory management with unobserved lost sales retailers are frequently uncertain about the underlying demand distribution of a new product when taking the empirical bayesian approach of scarf 1959 they simultaneously stock the product over time and learn about the distribution assuming that unmet demand is lost and unobserved this learning must be based on observing sales rather than demand which differs from sales in the event of a stockout using the framework and results of braden and freimer 1991 the cumulative learning about the underlying demand distribution is captured by two parameters a scale parameter that reflects the predicted size of the underlying market and a shape parameter that indicates both the size of the market and the precision with which the underlying distribution is known an important simplification result of scarf 1960 and azoury 1985 which allows the scale parameter to be removed from the optimization is shown to extend to this setting we present examples that reveal two interesting phenomena 1 a retailer may hope that compared to stocking out realized demand will be strictly less than the stock level even though stocking out would signal a stochastically larger demand distribution and 2 it can be optimal to drop a product after a period of successful sales we also present specific conditions under which the following results hold 1 investment in excess stocks to enhance learning will occur in every dynamic problem and 2 a product is never dropped after a period of poor sales the model is extended to multiple independent markets whose distributions depend proportionately on a single unknown parameter we argue that smaller markets should be given better service as an effective means of acquiring information

analysis of an inventory system under backorder correlated deterministic demand and geometric supply process abstract in this article we propose a single item periodic review model that investigates the effects of changes in the demand process that occur after stockout realizations we investigate a system where the demands in successive periods are deterministic but affected by the backorder realizations in order to capture the effects of changes in the demand process we use a geometric type supply availability we analytically derive the necessary components for obtaining profit related performance measures and provide computational analysis

technical note an optimal policy for joint dynamic price and lead time quotation for a dynamic joint price and lead time quotation problem with a fairly general demand function we show that the policy consisting of a threshold and a reward maximizing lead time is optimal this policy offers some interesting managerial insights under this policy finding the exact optimal quotation can be accomplished by single variable policy iterations of unimodal value functions

revenue management of a make to stock queue motivated by recent electronic marketplaces we consider a single product make to stock manufacturing system that uses two alternative selling channels long term contracts and a spot market of electronic orders at time 0 the risk averse manufacturer selects the long term contract price at which point buyers choose one of the two channels the resulting long term contract demand is a deterministic fluid while the spot market demand is modeled as a stochastic renewal process an exponential reflected random walk model is used to model the spot market price which is correlated with the spot market demand process the manufacturer accepts or rejects each electronic order and long term contracts and accepted electronic orders are backordered if necessary the manufacturer s control problem is to select the optimal long term contract price as well as the optimal production i e busy idle and electronic order admission policies to maximize revenue minus inventory holding and backorder costs under heavy traffic conditions the problem is approximated by a diffusion control problem and analytical approximations are used to derive a policy that is simple and reasonably accurate and robust

inventory control with information about supply conditions this paper presents an inventory control model which includes a markovian model of the supply system as that system evolves over time so do the replenishment leadtimes the optimal policy has the same structure as in standard models but its parameters change dynamically to reflect current supply conditions in this setting contrary to conventional wisdom a longer leadtime does not necessarily imply more inventory the leadtime is important but so is a concept we call order coverage

credence goods monopolists abstract with a credence good consumers never discover how much of the good they actually need therefore the seller acts as the expert determining the customers requirements this information asymmetry creates strong incentives for the seller to cheat on services we analyze whether the market mechanism may induce non fraudulent seller behavior we consider four scenarios differing in the amount of information consumers have at hand to infer the seller s incentives to be honest in three constellations the profit maximizing credence goods monopolist provides honest services only in one scenario there is no trade

backorder penalty cost coefficient b what could it be abstract the classical economic order quantity eoq model with planned penalized backorders pb relies on postulating a value for the backorder penalty cost coefficient b which is supposed to reflect the intangible adverse effect of the future loss of customer goodwill following a stockout recognizing that the effect of the future loss of customer goodwill should be not a direct penalty cost but a change in future demand schwartz 1966 a new approach to stockout penalties management science 12 12 b538 b544 modified the classical eoq pb model by eliminating the backorder penalty cost term from the objective function and assuming that the long run demand rate is a decreasing strictly convex function of the customer s disappointment factor defined as the complement of the demand fill rate following a stockout which in turn is an increasing strictly convex function of the demand fill rate he called the new model a perturbed demand pd model schwartz provided convincing justification for his pd model and presented several variations of it in a follow up paper but he did not solve any of these models in this paper we solve schwartz s original pd model and its variations and we discuss the implications of their solutions thus filling a gap in the literature left by schwartz moreover having been convinced that schwartz s approach is more valid than the classical approach for representing the effect of the loss of customer goodwill following a stockout but also recognizing that the classical approach is far more popular than the pd approach because of its simplicity and because of tradition we use the solution of the pd model to infer the value of b in the classical model thus providing one possible answer to the question what could b be a noteworthy implication of the solution of schwartz s original pd model is that the optimal fill rate is always 0 or 1 rendering the inferred value of b in the classical model 0 or respectively suspecting that the property of the pd function which is most likely responsible for producing this bang bang type of result is strict convexity we show that for the case where the pd function is proportional to an integer power say n of the fill rate the optimal fill rate is always 0 or 1 if and only if n 1 in which case the pd function is strictly convex in the fill rate

optimal operating policies in the presence of exchange rate variability we study the structure of the optimal policies for a firm operating plants in different countries the relative costs of production between the plants are assumed to vary over time due to economic and political factors such as exchange rates inflation taxes and tariffs based on the costs the firm can alter the quantity produced in each plant we determine the structure of the optimal policies for deciding when and by how much to alter the production quantities when the switch over costs are linear or step functions regardless of whether the variable production costs are concave or piece wise linear convex and regardless of whether the firm is supplying one or more markets the optimal policy is always a barrier policy the optimal barriers can be determined by using linear programming techniques and the optimal costs can be computed by solving a system of linear equations when the number of optimal barriers is two the optimal expected costs and the condition that determines the optimal barriers are explicitly derived

whatever the customer wants the customer gets exploring the gap between consumer preferences and default electricity products in germany abstract in liberalized electricity markets residential customers can choose their preferred provider and select among a variety of different electricity products including green power options successful product design and marketing strategies for green electricity may provide electricity providers with a competitive advantage while at the same time contributing to energy policy objectives this requires however a thorough understanding of customer preferences we investigate the relative importance of different product attributes in creating customer value and find that price and electricity mix are the two most important attributes the german electricity customers we surveyed in 2009 expressed an implicit willingness to pay a premium of about 16 for electricity from renewable sources we conclude that consumers are willing to pay a significant price premium for an upgrade from the current default electricity mix in germany to a more environmentally friendly default electricity mix and discuss implications for marketing strategy and energy policy our findings are based on a dataset of 4968 experimental choices made by 414 german residential consumers collected in a stated preference survey

myopic policies for some inventory models with uncertain demand distributions the majority of papers on stochastic inventory theory make the assumption that the distribution of consumer demand in each time period is known with certainty while this assumption is unsupported in many applied contexts it is conventionally held that more realistic models are more difficult to solve and will not yield simple operational policies this paper shows that a simple inventory policy based upon a critical fractile can be optimal or near optimal in some inventory models with parameter adaptive demand processes in these some parameter of the demand distribution is not known with certainty and estimates of the parameter are updated in a statistical fashion as demand is observed through time examples include exponentially smoothed forecasts and bayesian updating of parameter estimates bounds on the value loss relative to optimal cost when using the critical fractile policy can be calculated directly from the problem data some numerical examples illustrate the technique

price delivery time guarantees and capacity selection this paper studies the impact of using delivery time guarantees as a competitive strategy in service industries where demands are sensitive to both price and delivery time we assume that delivery reliability is crucial and investment in capacity expansion is plausible in order to maintain a high probability of delivering the time guarantee a mathematical framework is proposed to understand the interrelations among pricing delivery time guarantee and capacity expansion decisions specifically an optimization model is developed to determine the joint optimal selection of these three important decision variables with an objective of maximizing the average net profit we characterize the optimal decisions and study their qualitative behaviors as various parameters change we further present a numerical example to illustrate how the results of our model can be used to provide useful managerial insights for selecting the best competing strategies for firms with different operating characteristics our model and results are also applicable to a make to order manufacturing environment

a partially observed markov decision process for dynamic pricing in this paper we develop a stylized partially observed markov decision process pomdp framework to study a dynamic pricing problem faced by sellers of fashion like goods we consider a retailer that plans to sell a given stock of items during a finite sales season the objective of the retailer is to dynamically price the product in a way that maximizes expected revenues our model brings together various types of uncertainties about the demand some of which are resolvable through sales observations we develop a rigorous upper bound for the seller s optimal dynamic decision problem and use it to propose an active learning heuristic pricing policy we conduct a numerical study to test the performance of four different heuristic dynamic pricing policies in order to gain insight into several important managerial questions that arise in the context of revenue management

manufacturer incentives to improve retail service levels in this paper we provide a solution to the problem of how a manufacturer can provide an incentive to a separately owned retailer to raise its service level above the level it would choose on its own we analyze the effects the manufacturer s incentive has on the individual profits of the retailer and manufacturer as well as their joint profits our work is an application of game theory in which we tackle the problem posed by separate ownership of the two firms and the resulting conflict over the gains from cooperation we utilize a plausible model of service sensitive demand one which is relatively free of ad hoc assumptions our approach has the strength that it proposes a credible solution to the problem of manufacturer retailer cooperation when profits are sensitive to retail service levels our results indicate that the optimal level of incentive for the manufacturer and the resulting shares of the manufacturer and retailer in increased profits are particularly sensitive to the underlying variability of demand and to the relative variability of additional demand induced by higher service levels

adaptive inventory control for nonstationary demand and partial information this paper examines several different policies for an inventory control problem in which the demand process is nonstationary and partially observed the probability distribution for the demand in each period is determined by the state of a markov chain the core process however the state of this core process is not directly observed only the actual demand is observed by the decision maker given this demand process the inventory control problem is a composite state partially observed markov decision process pomdp which is an appropriate model for a number of dynamic demand problems in practice managers often use certainty equivalent control cec policies to solve such a problem however this paper presents results that demonstrate that there are other practical control policies that almost always provide much better solutions for this problem than the cec policies commonly used in practice the computational results also indicate how specific problem characteristics influence the performance of each of the alternative policies