design and analysis of simulated consumer choice or allocation experiments an approach based on aggregate data the authors integrate concepts in conjoint analysis and discrete choice theory in econometrics to develop a new approach to the design and analysis of controlled consumer choice or resource allocat

product and price competition in a duopoly this paper examines the role of consumer preferences costs and price competition in determining the competitive product strategy of a firm in the model studied here there are two identical firms competing on product quality and price they face consumers who prefer a higher quality product to a lower quality product but differ in how much they are willing to pay for quality the consumers can also choose a substitute if they don t like the product price offerings of the two firms for the firms a higher quality product costs more to produce than a lower quality product the paper shows that the equilibrium strategy for each firm should be to differentiate its product from its competitor with the firm choosing the higher quality choosing the higher margin as well this differentiation however is not efficient that is it is possible to choose two other products and offer them at prices that cover their marginal cost and still satisfy consumers needs better in the aggregate a monopolist by contrast would differentiate his product line efficiently this suggests that cannibalization has different effects on product strategy than competition the paper also shows that if one firm enters the market first then it can defend itself from later entrants and gain a first mover advantage by preempting the most desirable product position

agricultural price instability a survey of competing explanations and remedies there are two explanations for agricultural price dynamics one follows cobweb logic and models fluctuations driven by expectation errors but emphasises that these expectations create complex dynamics and possibly chaos the other stems from the rational expectations tradition of dynamics driven by real shocks the empirical evidence tends to support the latter but is not conclusive the rational expectations model generates an optimal dynamic path from which no improvement can be expected from public intervention however if we take account of all the potential market failures in agricultural markets and especially in developing countries this conclusion might require some qualifications although an appropriate policy design for stability has still to be achieved this paper surveys the positive and normative literature on agricultural prices highlighting empirical evidence and identifying remaining unresolved issues

an inventory model of immediate and delayed delivery this paper considers the long run profit maximizing strategy of a distributor that holds a good good 1 in inventory for immediate delivery and that offers a second good good 2 for delayed delivery when the two goods are substitutes an out of stock situation for good 1 will cause some consumers walkers to seek the good elsewhere other consumers waiters to accept a raincheck for later delivery of good 1 and others still switchers to place an order for good 2 it is shown that a profit maximizing strategy may entail setting a price for the delayed delivery item so as to encourage switching behavior the rationale is that the distributor can hold a smaller inventory thereby incurring lower holding costs because out of stock situations are less costly than they would be without some consumers being willing to switch

estimation of consumer demand with stock out based substitution an application to vending machine products the occurrence of temporary stock outs at retail is common in frequently purchased product categories available empirical evidence suggests that when faced with stock outs consumers are often willing to buy substitute items an important implication of this consumer behavior is that observed sales of an item no longer provide a good measure of its core demand rate sales of items that stock out are right censored while sales of other items are inflated because of substitutions knowledge of the true demand rates and substitution rates is important for the retailer for a variety of category management decisions such as the ideal assortment to carry how much to stock of each item and how often to replenish the stock the estimated substitution rates can also be used to infer patterns of competition between items in the category in this paper we propose methods to estimate demand rates and substitution rates in such contexts we develop a model of customer arrivals and choice between goods that explicitly allows for possible product substitution and lost sales when a customer faces a stock out the model is developed in the context of retail vending an industry that accounts for a sizable part of the retail sales of many consumer products we consider the information set available from two kinds of inventory tracking systems in the best case scenario of a perpetual inventory system in which times of stock out occurrence and cumulative sales of all goods up to these times are observed we derive maximum likelihood estimates mles of the demand parameters and show that they are especially simple and intuitive however state of the art inventory systems in retail vend ing provide only periodic data i e data in which times of stock out occurrence are unobserved or missing for these data we show how the expectation maximization em algorithm can be employed to obtain the mles of the demand parameters by treating the stock out times as missing data we show an application of the model to daily sales and stocking data pooled across multiple beverage vending machines in a midwestern u s city the vending machines in the application carry identical assortments of six brands since the number of parameters to be estimated is too large given the available data we discuss possible restrictions of the consumer choice model to accomplish the estimation our results indicate that demand rates estimated naively by using observed sales rates are biased even for items that have very few occurrences of stock outs we also find significant differences among the substitution rates of the six brands the methods proposed in our paper can be modified to apply to many nonvending retail settings in which consumer choices are observed not their preferences and choices are constrained because of unavailability of items in the choice set one such context is in store grocery retailing where similar issues of information availability arise in this context an important issue that would need to be dealt with is changes in the retail environment caused by retail promotions

network structure and regional innovation a study of university industry ties the emergence of the network paradigm has led to growing interest in understanding network structures relating to knowledge flows and patterns of regional innovation this paper explores the structure of knowledge networks stemming from ties between universities and other actors principally firms based upon a network analysis of empirical data for regions across the uk it is found that the most innovative and economically developed regions are more likely to be the location for actors holding highly central and influential positions within knowledge network architectures it is concluded that network structures and resulting stocks of structural network capital influence patterns of regional innovation and development

inventory competition for newsvendors under the objective of profit satisficing abstract inventory competition for newsvendors nvs has been studied extensively under the objective of expected profit maximization which is based on risk neutrality in this paper we study this classic problem under the objective of profit satisficing which is based on downside risk aversion consistent with prior literature we consider two possible scenarios in the first scenario each nv s demand depends on the stocking levels of all nvs other than herself in this scenario we show that there is a unique nash equilibrium where all nvs optimally order as if they were independent in the second scenario each nv s demand depends on the stocking levels of all nvs including herself we prove the existence of nash equilibrium for both additive and multiplicative forms of demands as a special case we also study symmetrical nvs under the proportional allocation model we show that at equilibrium if the number of nvs exceeds a threshold the market becomes highly competitive

single period multiproduct inventory models with substitution we study a single period multiproduct inventory problem with substitution and proportional costs and revenues we consider n products and n demand classes with full downward substitution i e excess demand for class i can be satisfied using product j for i j we first discuss a two stage profit maximization formulation for the multiproduct substitution problem we show that a greedy allocation policy is optimal we use this to write the expected profits and its first partials explicitly this in turn enables us to prove additional properties of the profit function and several interesting properties of the optimal solution in a limited computational study using two products we illustrate the benefits of solving for the optimal quantities when substitution is considered at the ordering stage over similar computations without considering substitution while ordering specifically we show that the benefits are higher with high demand variability low substitution cost low profit margins or low price to cost ratio high salvage values and similarity of products in terms of prices and costs

price competition with integrated and decentralized supply chains we consider price competition with a linear demand function and compare two cases in the first case each distribution channel is vertically integrated while in the second decentralised case the manufacturers and retailers act independently we explore the effect of varying the level of price competition on the profits of the industry participants and demonstrate the important role played by the spread of underlying market shares the coefficient of variation of these market shares determines whether decentralised supply chains can outperform integrated supply chains with an appropriate level of competition

looking for evidence of speculative stockholding in commodity markets abstract the theory of commodity price with speculative storage predicts that prices are a two regime process depending on whether or not inventories are held the price process is nonlinear in that it is nondifferentiable at some p which separates the data into a history independent regime and an autoregressive process this paper looks for evidence of nonlinearity in the price data and tests the theory in the context of threshold autoregressive models under the assumption that shocks to harvest are i i d while we find evidence for regime specific behavior we also find the degree of persistence in the stockout regime to be much stronger than that predicted by theory

long run prices of primary commodities and oil prices acutely volatile movements in primary commodity prices have drawn considerable interest from empirical researchers exports of these commodities account for the bulk of export earnings of developing countries the traditional demand based framework was unable to explain the marked deterioration in these prices during the 1980s this paper tries to ascertain the role played by real oil prices in explaining the extremely volatile movements in real prices of primary commodities by taking into account oil price shocks over the period 1973 1996 using monthly data real primary commodity prices and real oil prices are cointegrated additionally the error in the cointegrating relation stimulates real commodity price adjustment not real oil price adjustment

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

does bait and switch really benefit consumers while the field of marketing science has long been interested in the effects of promotional efforts public policy issues involving illegal marketer fraud and deception have generally not been addressed in this body of work one key exception to this generalization is a marketing science article suggesting that the practice of bait and switch may be beneficial to consumers and furthermore that the federal trade commission should investigate revising its standards to legitimize this practice gerstner and hess 1990 this finding and recommendation seemed so significant that it is surprising that the recommendation has not to date been explored in greater detail in this paper we further explore the impact of the two components of bait and switch out of stock and upselling we do this by using moorthy s 1993 theoretical modeling framework to systematically extend and assess the gerstner and hess model we find that the previously reported increase in consumer welfare that arises from allowing out of stock conditions at retailers is actually due to the utility created by salespersons explaining product features and benefits not by the out of stock thus the ramifications of both our legal and modeling analyses are that deceptive bait and switch practices result in harm to consumers and should not be legalized our paper concludes by proposing worthwhile modeling issues for further exploration in addition we suggest that our procedure for analyzing public policy issues by exploring the confluence of law consumer behavior and marketing models can serve as a useful exemplar for further contributions to public policy by marketing scientists

two period dynamic versus fixed ratio pricing in a capacity constrained duopoly this paper analyzes the impact of dynamic and fixed ratio pricing policies on firm profits and equilibrium prices under competition firms that have equal inventories of perfectly substitutable and perishable products compete for customer segments that demand the product at different times in each period customers first purchase from the low price firm and then from the high price firm up to their inventories provided the prices are lower than the maximum they are willing to pay the main conclusions of this paper are as follows although dynamic pricing is a more sophisticated policy than fixed ratio pricing it may lead to decreased equilibrium profits under both pricing policies one firm assumes the role of a low cost high output firm while the other assumes the role of a high cost low output firm and the supply demand ratio has more impact on the outcome of the competition than the heterogeneity in consumer reservation prices

can bait and switch benefit consumers we present a model that leads to an equilibrium with characteristics similar to the following stylized facts observed in retail markets a retailers advertise only selected brands b often low priced advertised brands are understocked c in store promotions are biased towards more expensive substitute brands together these practices constitute illegal bait and switch is this phenomenon necessarily harmful to consumers and to the economy we show that bait and switch can benefit consumers because utility is created through in store promotions and price competition is enhanced this suggests that the ftc investigate further its ban on bait and switch

a static approximation for dynamic demand substitution with applications in a competitive market we propose a static approximation of dynamic demand substitution behavior based on a fluid network model and a service inventory mapping this approximation greatly enhances our ability to analyze the interdependent inventory service price and product assortment decisions in noncompetitive and competitive scenarios with demand substitution we demonstrate that the approximation is well behaved and then apply it to two previously intractable applications first we study a price and service competition between single product retailers after establishing a unique pure strategy nash equilibrium we find that competition results in lower price higher demand and a higher level of inventory we also observe that the aggregate profit and inventory level increase to positive constants as the number of retailers goes to infinity second we study a duopolistic competition on price service and product assortment we establish a pure strategy nash equilibrium for the product assortment competition and identify a condition for uniqueness we find that competition on both price and product assortment results in lower price and less variety for each competitor but the total number of products and the aggregate inventory level in a duopoly market are both likely to be higher than in a monopolistic market

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

leveraging knowledge as a competitive asset the intensity performance and structure of universities entrepreneurial knowledge exchange activities at a regional level universities are no longer considered to be isolated islands of knowledge but as institutions increasingly engaged with a range of external partners through entrepreneurial activities this paper examines the associations between the intensity and performance of knowledge exchange activities undertaken in uk universities with non academic actors drawing on data concerning the structural factors of interactions of universities in the uk with external partners the paper sheds further light on the nature of these activities through a prism of competitive and uncompetitive regions in order to better understand how universities may be able to leverage both their knowledge and partnerships more effectively as competitive assets on the one hand it is found that academics in uncompetitive regions are more intensively engaged in entrepreneurial activities but generate less income from them than their counterparts in competitive regions suggesting that there are differences in the income generating capacity of academics across regions on the other hand academic knowledge is found to be more strongly bounded within a certain distance in uncompetitive regions whilst geographical distance seems less of a hindrance to academics in competitive regions

revenue management under joint pricing and capacity allocation competition abstract we investigate joint pricing and capacity allocation decisions of a duopoly each of which competes in selling a fixed amount of substitutable perishable goods in both early discount and regular full fare markets with demand uncertainty upon a firm s stockout unsatisfied demand spillovers to the competitor depending on the substitutability of products offered by the two firms we first show that there exists a pure strategy nash equilibrium for identical firms there exists a unique pure strategy nash equilibrium that is symmetric then we study how firms pricing and capacity allocation decisions depend on operational and market conditions in particular we show that more cut throat competition in the full fare market never leads to a rise in the price and a fall in the protection level simultaneously in the full fare market we demonstrate a similar result of comparative statics for the competition intensity in the discount market in comparison with a monopolist s optimal decision a duopoly equilibrium never results in a situation that definitely benefits the full fare consumers in both dimensions of price and availability finally we examine how the adoption of early discount as practiced in the airline industry may benefit competing firms when one of the two firms first introduces early discount sales we find that there is a free ride effect for the other firm interestingly the free rider can benefit more than the adopter especially with stronger competition

bricks and mortar vs clicks and mortar an equilibrium analysis abstract the internet has provided traditional retailers a new means with which to serve customers consequently many bricks and mortar retailers have transformed to clicks and mortar by incorporating internet sales examples of companies making such a transition include best buy wal mart barnes noble etc despite the increasing prevalence of this practice several fundamental questions remain 1 does it pay off to go online 2 which is the equilibrium industry structure 3 what is the implication of this business model for consumers we study these issues in an oligopoly setting and show that clicks and mortar arises as the equilibrium channel structure however we find that this equilibrium does not necessarily imply higher profits for the firms in some cases rather it emerges as a strategic necessity consumers are generally better off with clicks and mortar retailers if firms align with pure e tailers to reach the online market we show that a prisoner s dilemma type equilibrium may arise

how much of commodity price behavior can a rational expectations storage model explain a rational expectations competitive storage model was applied to the u s corn market to assess the aptness of this framework in explaining monthly price behavior in an actual commodity market relative to previous models extensive realism was added to the model in terms of how production activities and storage costs are specified by modeling convenience yield backwardation in prices between crop years did not depend on the unrealistic assumption of zero ending stocks our model generated cash prices that were distributed with positive skewness and kurtosis and mean and variance that increased over the storage season comparable to the persistence and the occasional spikes observed in commodity prices futures prices were generated as conditional expectations of cash prices at contract maturity and the variances of futures prices exhibited realistic time to maturity and seasonal patterns model realizations of cash and futures prices over many years were used to demonstrate the wide variety of price behaviors that could be observed in an efficient market with a similar market structure implying that economic and policy implications drawn from short historical samples of prices could be misleading

the empirical merit of structural explanations of commodity price volatility review and perspectives this paper presents both the history of and state of the art in empirical modeling approaches to the world commodity price volatility the analysis builds on the storage model and key milestones in its development specifically it is intended to offer a reader unfamiliar with the relevant literature an insight into the modeling issues at stake from both a historical and speculative viewpoint the review considers primarily the empirical techniques designed to assess the merits of the storage theory it does not address purely statistical approaches that do not rely on storage theory and that have been studied in depth in other streams of the commodity price literature the paper concludes with some suggestions for future research to try to resolve some of the existing empirical flaws and hopefully to increase the explanatory power of the storage model

using game theory to model competition the article is an exposition of the basic concepts of noncooperative game theory and their application to advertising product and price competition

faculty support for the objectives of university industry relations versus degree of r d cooperation the importance of regional absorptive capacity abstract the growing importance of regions in the analysis of innovation and the pressure on european universities to interact with their environment justify this article it argues that faculty support for the objectives of university industry relations uir does not vary across disciplines and does not respond to university encouragement in a region with low absorptive capacity these results are in contrast with those obtained in studies of technology leading countries like the usa furthermore incentives for uir may generate unpredicted dynamics while instruments to cooperate are not significant finally support for the objectives of uir should not be confused with the degree of r d cooperation the former is sensitive to university age while the latter is sensitive to gender discipline commitment to r d and university encouragement empirical evidence is obtained from a sample of faculty from the valencian community spain and analysed through a set of models for discrete choice

knowledge interactions between universities and industry in austria sectoral patterns and determinants the relationship between university and industry is a complex and heterogeneous phenomenon and an important topic of the recent debate on innovation systems this chapter explores the role of knowledge flows between universities and firms in the austrian national innovation system and provides valuable insights into several dimensions of knowledge flows that are not typically explored in research on this topic the patterns of interaction between 46 different fields of science and 49 economic sectors represent an important and interesting outcome of the analysis left censored tobit models are used to evaluate the effect of sector specific and science field specific characteristics upon the probability of knowledge interaction disaggregated by type of interaction

technical note robust newsvendor competition under asymmetric information we generalize analysis of competition among newsvendors to a setting in which competitors possess asymmetric information about future demand realizations and this information is limited to knowledge of the support of demand distribution in such a setting traditional expectation based optimization criteria are not adequate and therefore we focus on the alternative criterion used in the robust optimization literature the absolute regret minimization we show existence and derive closed form expressions for the robust optimization nash equilibrium solution for a game with an arbitrary number of players this solution allows us to gain insight into the nature of robust asymmetric newsvendor competition we show that the competitive solution in the presence of information asymmetry is an intuitive extension of the robust solution for the monopolistic newsvendor problem which allows us to distill the impact of both competition and information asymmetry in addition we show that contrary to the intuition a competing newsvendor does not necessarily benefit from having better information about its own demand distribution than its competitor has

dynamic pricing with uncertain production cost an alternating move approach abstract this article studies a two firm dynamic pricing model with random production costs the firms produce the same perishable products over an infinite time horizon when production or operation costs are random in each period each firm determines its price and production levels based on its current production cost and its opponent s previous price level we use an alternating move game to model this problem and show that there exists a unique subgame perfect nash equilibrium in production and pricing decisions we provide a closed form solution for the firm s pricing policy finally we study the game in the case of incomplete information when both or one of the firms do not have access to the current prices charged by their opponents

r d internationalization r d collaboration and public knowledge institutions in small economies evidence from finland and the netherlands this paper investigates domestic and foreign innovating firms determinants of r d collaboration with domestic universities and public knowledge institutes in finland and the netherlands we put particular emphasis on the impact of incoming academic spillovers on the probability to co operate with these public r d institutes based on data from community innovation surveys we find that foreign firms in the netherlands are less likely to co operate with domestic public knowledge institutions than domestic firms while in finland no significant difference can be detected another result is that incoming knowledge spillovers are an important determinant for r d collaboration with domestic public knowledge institutions in both countries in case of foreign firms in finland incoming knowledge spillovers affect the probability to co operate with public knowledge institutions more positively as compared with domestic firms for the netherlands no substantial difference could be found in this respect further innovating firms in finland that require academic or basic knowledge do not co operate significantly more with public knowledge institutions than those that need applied knowledge at the same time they are willing to share knowledge with public r d partners in the netherlands innovating firms that require relatively more basic than applied knowledge increase the probability of co operation with dutch universities and public knowledge institutions but there is reluctance to share proprietary knowledge with public r d partners for both countries no significant difference between foreign and domestic firms with regard to academic knowledge requirements could be found this raises the issue whether finnish innovation policies with a strong focus on r d co operation provide incentives for strategic behaviour by domestic public partners to put more emphasis on applied research

bertrand equilibrium with capacity constraints and restricted mobility this paper considers price competition among firms when there are capacity constraints and buyers have limited ability to visit firms a natural method of allocating buyers among firms arises in the equilibrium of the buyers search game sufficient conditions are given under which the buyers equilibrium varies continuously with the prices charged by firms capacity constraints are used to guarantee that this ensures existence of mixed strategy equilibria for the pricing game played by sellers we show that natural pure strategy equilibria arise when the game is made large in appropriate ways since bertrand s criticism of cournot it has been known that models where sellers compete with prices may have undesirable properties when the commodities traded are homogenous in the simplest models with constant marginal costs price may be driven down to the competitive level even when there are only two firms more problematic if sellers are subject to capacity constraints nash in prices equilibrium may not exist at all these problems all arise because of a discontinuity in firms profit functions that arises when the prices of two or more firms are equal there have been many attempts to resolve this problem the simplest is to constrain sellers prices to be equal and to force them to compete in quantities this is the basis of most of the literature on monopolistic competi

what drives the formation of valuable university industry linkages insights from the wine industry abstract most of the literature on university industry u i linkages assumes that these linkages are beneficial per se we question this assumption suggesting that not all such linkages are equally helpful in this paper we explore the factors driving the formation of valuable u i linkages conceived as those linkages between universities and firms that have a higher potential to diffuse knowledge to other firms in their regional economy our empirical strategy combines case study methodology with econometric techniques using data from two wine clusters in chile and in italy the firm s knowledge base is found to be a key driver of valuable u i linkages we conclude that selectivity should be encouraged among policy makers endeavouring to promote u i linkages

stocking retail assortments under dynamic consumer substitution we analyze a single period stochastic inventory model newsboy like model in which a sequence of heterogeneous customers dynamically substitute among product variants within a retail assortment when inventory is depleted the customer choice decisions are based on a natural and classical utility maximization criterion faced with such substitution behavior the retailer must choose initial inventory levels for the assortment to maximize expected profits using a sample path analysis we analyze structural properties of the expected profit function we show that under very general assumptions on the demand process total sales of each product are concave in their own inventory levels and possess the so calleddecreasing differences property meaning that the marginal value of an additional unit of the given product is decreasing in the inventory levels of all other products for a continuous relaxation of the problem we then show via counterexamples that the expected profit function is in general not even quasiconcave thus global optimization may be difficult however we propose and analyze a stochastic gradient algorithm for the problem and prove that it converges to a stationary point of the expected profit function under mild conditions finally we apply the algorithm to a set of numerical examples and compare the resulting inventory decisions to those of some simpler naive heuristics the examples show that substitution effects can have a significant impact on an assortment s gross profits the examples also illustrate some systematic distortions in inventory decisions if substitution effects are ignored in particular under substitution one should stock relatively more of popular variants and relatively less of unpopular variants than a traditional newsboy analysis indicates

on the sources and significance of interindustry differences in technological opportunities abstract the set of technological opportunities in a given industry is one of the fundamental determinants of technical advance in that line of business we examine the concept of technological opportunity and discuss three categories of sources of those opportunities advances in scientific understanding and technique technological advances originating in other industries and in other private and governmental institutions and feedbacks from an industry s own technological advances data from the yale survey on industrial research and development are used to measure the strength of various sources of technological opportunity and to discern interindustry differences in the importance of these sources we find that interindustry differences in the strength and sources of technological opportunities contribute importantly to explanations of cross industry variation in r d intensity and technological advance

gaining more by stocking less a competitive analysis of product availability the price competition between two firms can affect their decisions about product availability with occasional stockouts a firm loses from foregone sales yet it may indirectly benefit from the higher price a competitor is able to charge the more prone customers are to search elsewhere for the product upon encountering a stockout the greater is the gain from the reduced price competition between firms this paper establishes conditions whereby the strategic interaction of reduced price competition between firms outweighs the loss from foregone sales in such cases a firm can increase its expected profits by choosing to stock less these results provide a competitive rationale for the high stockout levels observed in some retail situations and have implications for the analysis of product availability in public policy settings

a classification of the literature on the planning of substitutable products abstract a company s assortment of products and corresponding inventory levels are constrained by available resources such as production capacity storage space and capital to acquire the inventory thus customers may not always be able to find a most preferred product at the time of purchase this unsatisfied demand is often substituted with an alternative in the extant literature there have been an increasing number of studies that consider product substitution when planning product assortment inventory and capacity in conjunction with pricing in this paper we classify the literature on the planning of substitutable products published in the major om and marketing journals during the past thirty years 1974 2013 and present a comprehensive taxonomy of the literature one criterion is adopted to discuss modeling objectives and three major criteria are provided to define the nature of product substitution including substitution mechanism substitution decision maker and direction of substitutability we also identify research gaps to provide guidance for related research in the future

product availability in competitive and cooperative dual channel distribution with stock out based substitution abstract this paper investigates the impact of customers stock out based substitution on the product availability and the channel efficiency of a dual channel supply chain which consists of a supplier distributing a single product to customers through both its wholly owned direct channel and an independent retailer the supplier and its retailer with the objective of optimizing their own profit simultaneously choose their own base stock level to satisfy the stochastic demand from the customers whose channel preferences are heterogeneous and may be affected by each channel s product availability the customers dynamically substitute between the two channels in the event of a stock out the result shows that the effect of the stock out based substitution may increase or decrease the efficiency of a decentralized supply chain it is found that while the integrated supplier retailer may consolidate the base stock levels to benefit from stock out based substitution the independent supplier and retailer are more inattentive to customers stock out based substitution thus the competitive base stock levels of the decentralized dual channel supply chain rarely agree with the system optimal levels various contracts are examined to shed light on channel coordination mechanisms in addition it is shown that the channel efficiency of the dual channel distribution can be improved by the emergence of stackelberg leadership from either the supplier or the retailer

accounting profits versus marketing profits a relevant metric for category management retailers have long recognized that some categories are more important than others in consumers store choice decisions the overall profitability of a store requires careful category level merchandising decisions to draw the most desirable consumers into the store however the traditional accounting measure of category profits offers imperfect help making these decisions since it does not take into account the effect of merchandising one category on the profits of other categories in the store a profit measure which takes into account these important cross effects is the most relevant performance metric for category management we call this new construct marketing profits as it focuses on consumers and their store choice behavior and is particularly pertinent to the calculus of marketing decision making despite its practical importance the total impact of merchandising a specific product category on a store s profitability is difficult to measure and in practice managers can only rely on intuitive calibration of marketing profits in making many retailing decisions the difficulty arises from the fact that to directly observe the marketing profits of a category one has to know how consumer store shopping behavior would change and hence what a store s profit would be if the category were to disappear from the consumers store choice decision furthermore it is difficult to devise a demand structure that is rich enough to capture bundled purchases on the part of consumers in a reasonable manner but is simple enough to allow estimation on the basis of commonly observed variables these two technical difficulties explain the conspicuous lack of research that systematically examines how to quantify what we call marketing profits this paper builds a formal model of marketing profits we start by formalizing shopper types and then establish the implied relationship between accounting profits and marketing profits by examining shelf space allocations by a retailer on the consumer side we assume that some consumers pay attention to the assortments offered by different retailers when making their store choice decisions this assumption allows us to establish the demand side linkage between accounting profits and marketing profits consumer store choice decisions put pressure on the retailer to carry wide assortments in categories which are particularly critical to the store choice decisions of the most desirable consumers thus the allocation of shelf space gives rise to the supplyside linkage between accounting profits and marketing profits by examining the outcome of the supermarket s shelf space decision we can merge these two linkages and determine the exact relationship between the accounting and marketing profits central to our theoretical structure is our assumption on retailers shelf space allocation decisions because of the well documented pressure that retailers face in making shelf space allocation decisions we assume that they are acting in a reasonably close to optimal fashion by using either an automated planogram or simply by trial and error optimization requires that returns on shelf space allocated to any category in the store must be identical on the margin and equate to the shadow price of shelf space it is this outcome of shelf space allocation that allows us to uncover the implied relationship between accounting and marketing profits this theoretical structure allows us to construct a measure of marketing profits which can be estimated with data commonly available to retailers we demonstrate this measurement technique by using publicly available data provided by marsh supermarkets and show how marketing profits can improve merchandising decisions in our particular application we find many categories where the marketing profits of a category are very different from the traditional accounting profits further we nd that using this new marketing profits metric to make category level feature advertising space decisions significantly improves the profitability of the retailer the paper concludes by discussing how our measure of marketing profits might be improved by additional research particularly if the researcher has data across many stores

the relationship between distribution and market share this paper develops an aggregate level model of distribution and market share for frequently purchased branded consumer goods that is founded in the concepts of push and pull the model makes a key distinction between uncompromised and compromised demand as sources of market share uncompromised demand is demand that is satisfied when the preferred brand is found compromised demand results from brands that lack broad distribution and whose potential customers are willing to compromise and purchase another brand when the preferred brand is not present trade behavior is also addressed by analyzing the effects of consumer demand feedback on the trade s decision to stock and merchandise the brand compromised demand and feedback effects may be critical and often overlooked determinants of market share under a variety of model assumptions analytical results are consistent with longitudinal and cross sectional evidence that market share is a convex function of distribution increasing at an increasing rate up to 100 percent distribution in addition to these insights we believe that the model has promise for future normative work on balancing push and pull marketing effects

testing competitive market structures an accurate understanding of the structure of competition is important in the formulation of many marketing strategies for example in new product launch product reformulation or positioning decisions the strategist wants to know which of his competitors will be most affected and hence most likely to respond many marketing science models have been proposed to identify market structure in this paper we examine the managerial problem and propose a criterion by which to judge an identified market structure basically our criterion is a quantification of the intuitive managerial criterion that a submarket is a useful conceptualization if it identifies which products are most likely to be affected by our marketing strategies we formalize this criterion within the structure of classical hypothesis testing so that a marketing scientist can use statistical statements to evaluate a market structure identified by 1 behavioral hypotheses 2 managerial intuition or 3 market structure identification algorithms mathematically our criterion is based on probabilities of switching to products in the situation where an individual s most preferred product is not available submarkets are said to exist when consumers are statistically more likely to buy again in that submarket than would be predicted based on an aggregate constant ratio model for example product attributes e g brand form size use situations e g coffee in the morning versus coffee at dinner and user characteristics e g heavy versus light users are specified as hypotheses for testing alternate competitive structures measurement and estimation procedures are described and a convergent approach is illustrated an application of the methodology to the coffee market is presented and managerial implications of six other applications are described briefly

a monopolistic and oligopolistic stochastic flow revenue management model this paper studies a one shot inventory replenishment problem with dynamic pricing the customer arrival rate is assumed to follow a geometric brownian motion homogeneous customers have an isoelastic demand function and do not behave strategically we find a closed form optimal pricing policy which utilizes current demand information under this pricing policy the inventory trajectory is deterministic and a retailer sells all inventory we show that dynamic pricing coordinated with the inventory decision achieves significantly higher profits than does static pricing furthermore under oligopolistic competition we establish a weak perfect bayesian equilibrium for the price and inventory replenishment game we find the pricing equilibrium to be cooperative even in a noncooperative environment but that inventory competition results in overstock and damages profits finally we examine the trade off between dynamic pricing and price precommitment and find that flexible pricing is still beneficial provided competition is not too intense

sell the plant the impact of contract manufacturing on innovation capacity and profitability in the electronics industry and others original equipment manufacturers oems are selling their production facilities to contract manufacturers cms the cms achieve high capacity utilization through pooling supplying many different oems meanwhile the oems focus on innovation research and development product design and marketing we examine how this change in industry structure affects investment in innovation and capacity and thus profitability in particular innovation is noncontractible so oems will invest less in innovation than is ideal for the industry as a whole hence although contract manufacturing improves capacity utilization it may reduce the profitability of the industry as a whole by weakening the incentives for innovation contract manufacturing is not the only means to achieve capacity pooling alternatively the oems can pool capacity with one another through supply contracts or a joint venture this may result in underinvestment or overinvestment in innovation and capacity but always increases profitability we find that the sale of production facilities to a cm improves profitability for the industry as a whole if and only if oems are subsequently in a strong bargaining position vis a vis the cm if the oems are indeed very strong the gain from pooling capacity via contract manufacturing is maximized in industries with moderate cost of capacity

an industry equilibrium analysis of downstream vertical integration this paper investigates the effect of product substitutability on nash equilibrium distribution structures in a duopoly where each manufacturer distributes its goods through a single exclusive retailer which may be either a franchised outlet or a factory store static linear demand and cost functions are assumed and a number of rules about players expectations of competitors behavior are examined it is found that for most specifications product substitutability does influence the equilibrium distribution structure for low degrees of substitutability each manufacturer will distribute its product through a company store for more highly competitive goods manufacturers will be more likely to use a decentralized distribution system this article was originally published in marketing science volume 2 issue 2 pages 161 191 in 1983

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

competitive promotional strategies this article analyzes the equilibrium pricing strategies of brands engaged in a pricing game each brand has a monopoly market loyal consumers and competes with others in a common market called brand switchers in the case of a duopoly it is shown that the behavior of the brand switchers characterizes the equilibrium behavior of the duopolists this article focuses on two key comparative statics namely the depth of discounts away from a regular high price and the probability of giving a deal or the frequency of deals how these properties vary with the size of the loyal markets and the behavior of the brand switching population is discussed copyright 1988 by the university of chicago

capacity allocation using past sales when to turn and earn consider a supplier selling to multiple retailers demand varies across periods but the supplier s capacity and wholesale price are fixed if demand is high the retailers needs exceed capacity and the supplier must implement an allocation mechanism to dole out production we examine how the choice of mechanism impacts retailer actions and supply chain performance in particular we analyze turn and earn allocation a method commonly used in the automobile industry this scheme bases current allocations on past sales and thus enables retailers to influence their future allocations they compete for scarce capacity even if they do not compete for customers we show that turn and earn induces the retailers to increase their sales when demand is low and the supplier s capacity is otherwise underutilized supplier profits thus increase the impact on the supply chain depends on how restrictive capacity is with mildly tight capacity the retailers higher sales rate does not significantly lower their profits but does reduce the cost of idle capacity supply chain performance improves with extremely tight capacity the retailers intense competition dissipates more profits than the supplier gains and supply chain performance suffers consequently turn and earn does not generally coordinate the system it is best characterized as a means for the supplier to increase her profits at the expense of the retailers and potentially even the supply chain furthermore these results hold even if the retailers can hold inventory in anticipation of scarce capacity

inventory competition and allocation in a multi channel distribution system abstract consider a supply chain involving one manufacturer and one independent retailer the manufacturer distributes her product to the end consumer through the independent retailer as well as through her direct channel each of the two channels faces a stochastic demand if one channel is out of stock a fraction of the unsatisfied customers visit the other channel which induces inventory competition between the channels under the scenario described above will the manufacturer ever undercut the retailer s order when the capacity is infinite what are the equilibria of the game how does a capacity constraint affect the equilibrium outcome what is the optimal inventory allocation strategy for the manufacturer using a game theoretic model we seek answers to the above questions both the capacitated and the infinite capacity games are considered we establish the necessary condition for a manufacturer to undercut a retailer s order and show that a manufacturer may deny the retailer of inventory even when the capacity is ample we show that there can be an equilibrium in the capacitated game where a manufacturer might not use the entire capacity and still deny a retailer inventory we also show that a mild capacity constraint may make both parties better off and thereby increase the total supply chain profit we develop a simple yet practical contract called the reverse revenue sharing contract and show that along with a fixed franchise fee this contract can coordinates our decentralized supply chain

consequences of a commodity boom in a controlled economy accumulation and redistribution in kenya 1975 83 the economic theory of dutch disease is extended and applied to the 1976 79 coffee boom in kenya in this article when a commodity boom is perceived as temporary a large fraction will tend to be saved out of transient income the spending effect of the boom is supplemented by relative price changes resulting from capital stock increases in the presence of foreign exchange and import controls the benefits of a sudden export price increase may be transferred intersectorally using a general equilibrium model it is estimated that in kenya the benefits of the boom were largely transferred from coffee growers to urban groups

revenue management for low cost providers low cost providers have emerged as important players in many service industries the most predominant being low cost or the so called discount airlines this paper presents models and results leading toward understanding the revenue management outlook for a discount pricing firm a framework and model is formulated specifically for the airline industry but is generalizable to low cost providers in similar revenue management settings we formulate an optimal pricing control model for a firm that must underprice to capture a segment of exogenous demand two specific model formulations are considered a continuous deterministic version and a discrete stochastic version structural results are derived for the deterministic case providing insight into the general form of optimal underpricing policies the stochastic results support the structural insight from the deterministic solution and illuminate the effect of randomness on the underpricing policies

a heteroskedastic multivariate tobit analysis of price dynamics in the presence of price floors this article presents an econometric analysis of the effects of price floors on price dynamics and price volatility in a multimarket context we investigate the implications of a government price support program providing a censoring mechanism to the price determination process the analysis uses a dynamic multivariate tobit model under time varying volatility the model is applied to the u s dairy markets with a special focus on the effects of government price support programs in a period of market liberalization the econometric analysis provides useful information on the multimarket effects of price supports on price dynamics and price volatility

technical note an expectation maximization method to estimate a rank based choice model of demand we propose an expectation maximization em method to estimate customer preferences for a category of products using only sales transaction and product availability data the demand model combines a general rank based discrete choice model of preferences with a bernoulli process of customer arrivals over time the discrete choice model is defined by a probability mass function pmf on a given set of preference rankings of alternatives including the no purchase alternative each customer is represented by a preference list and when faced with a given choice set is assumed to either purchase the available option that ranks highest in her preference list or not purchase at all if no available product ranks higher than the no purchase alternative we apply the em method to jointly estimate the arrival rate of customers and the pmf of the rank based choice model and show that it leads to a remarkably simple and highly efficient estimation procedure all limit points of the procedure are provably stationa

minimal and maximal product differentiation in hotelling s duopoly abstract hotelling s 1929 model of duopolistic competition is re examined a family of utility functions is used which has as a special case hotelling s original utility function in a two stage location price game it is shown that an equilibrium exists when the curvature of the utility functions in the space of characteristics is sufficiently high the subgame perfect equilibrium never exhibits minimum product differentiation on the other hand not all equilibria are at maximal product differentiation

the social shaping of the national science base abstract innovation studies confirm de tocqueville s prediction that continuous technical change in business firms in modern society would require the development in close proximity of publicly funded basic research and associated training the rate and direction of the development of a country s science base is strongly influenced by its level of economic development and the composition of its economic and social activities in other words it is socially shaped

inventory competition under dynamic consumer choice we analyze a model of inventory competition among n firms that provide competing substitutable goods each firm chooses initial inventory levels for their good in a single period newsboy like inventory model customers choose dynamically based on current availability so the inventory levels at one firm affect the demand of all competingfirms this creates a strategic interaction amongthe firms inventory decisions our work extends earlier work on variations of this problem by karjalainen 1992 lippman and mccardle 1997 and parlar 1988 specifically we model demand in a more realistic way as a stochastic sequence of heterogeneous consumers who choose dynamically from amongthe available goods or choose not to purchase based on a utility maximization criterion we also use a sample path analysis so minimal assumptions are imposed on this demand process we characterize the nash equilibrium of the resulting stocking game and prove it is unique in the symmetric case we show there is a bias toward overstocking caused by competition specifically reducing the quantity stocked at any equilibrium of the game increases total system profits and at any joint optimal set of stocking levels each firm has an individual incentive to increase its own stock for the symmetric case we show that as the number of competing firms increases the overstockingbecomes so severe that total system and individual firm profits approach zero finally we propose a stochastic gradient algorithm for computing equilibria and provide several numerical examples

newsvendor competition under asymmetric cost information abstract we study the newsboy duopoly problem under asymmetric cost information we extend the lippman and mccardle 1997 of competitive newsboy to the case where the two firms are privately informed about their unit costs the market demand is initially split between two firms and the excess demand for each firm is reallocated to the rival firm we show the existence and uniqueness of a pure strategy equilibrium and characterize its structure the equilibrium conditions have an interesting recursive structure that enables an easy computation of the equilibrium order quantities presence of strategic interactions creates incentives to increase order quantities for all firm types except the type that has the highest possible unit cost consequently competition leads to higher total inventory in the industry however contrary to intuition this is only true when the firms are non identical a firm s equilibrium order quantity increases with a stochastic increase in the total industry demand or with an increase in his initial allocation of the total industry demand we demonstrate our model and results in an application in a dual sourcing procurement setting using data that obtained from a large manufacturing company finally we provide a full characterization of the equilibrium of the game for the special case of uniform demand and linear market shares

competition through capacity investment under asymmetric existing capacities and costs this paper discusses the way that different operational characteristics including existing capacity scale economies and production policy have an important influence on the capacity outcomes when firms compete in the market place we formulate a game theoretical model where each firm has an existing capacity and faces both fixed and variable costs in purchasing additional capacity specifically the firms simultaneously or sequentially make their expansion decisions and then simultaneously decide their production decisions with these outputs being capacity constrained we also compare our results with cases where production has to match capacity by characterizing the firms capacity and production choices in equilibrium our analysis shows that the operational factors play a crucial role in determining what happens the modeling and analysis in the paper gives insight into the way that the ability to use less production capacity than has been built will undermine the commitment value of existing capacity if a commitment to full production is not possible sinking operational costs can enable a firm to keep some preemptive advantage we also show that the existence of fixed costs can introduce cases where there are either no pure strategy equilibrium or multiple equilibria the managerial implications of our analysis are noted in the discussion our central contribution in this paper is the innovative integration of the strategic analysis of capacity expansion and well known s s policy in operations and supply chain theory

technical note a multiperiod model of inventory competition this paper explores when it is important for firms to consider stockout based substitution and competitor s inventory levels in making inventory decisions in the context of a duopoly model to address this question we consider a model where two newsvendors sell substitutable products in a market with aggregate market demand d the two firms get a proportion p and 1 p of this demand where p is random we characterize the equilibrium inventory levels of the two firms in a single period model and show the striking property that under certain reasonable conditions on the cost parameters the two firms ignore their competitor s inventory levels and potential substitution demand i e their inventory decisions are decoupled furthermore we show under slightly more restrictive conditions on the cost parameters that the single period results can be extended to the case where d is random finally we extend the decoupling property to a multiperiod periodic review scenario and show that the resulting nash equilibrium can be characterized simply as the solution to a single product dynamic newsvendor problem that ignores substitution demand

loss leader pricing and rain check policy loss leader pricing and rain check policies are common in retail markets yet research on these topics is surprisingly scarce in this paper we study the effects of leader pricing and rain check policy on stores profits and market outcomes suppose stores can accurately predict demand might they still run out of stock we investigate whether such a result is plausible when stores can offer rain checks the paper also helps resolve an issue that has recently attracted much attention should the ftc repeal its rule prohibiting stock outs of advertised sale items

bertrand edgeworth equilibria when firms avoid turning customers away this paper provides a simple solution to the problem of nonexistence of pure strategy equilibria in bertrand edgeworth models with strictly convex costs the voluntary trading constraint in standard bertrand edgeworth models is generalized to allow for there being costs incurred when customers are turned away so long as the industry is sufficiently large the presence of such costs ensures that the competitive price will be an equilibrium there will be other single price equilibria but if the offense costs are small all equilibria will be close to the competitive outcome

on the relationship between inventory costs and variety benefits in retailassortments consider a category of product variants distinguished by some attribute such as color or flavor a retailer must construct an assortment for the category i e select a subset variants to stock and determine purchase quantities for each offered variant we analyze this problem using a multinomial logit model to describe the consumer choice process and a newsboy model to represent the retailer s inventory cost we show that the optimal assortment has a simple structure and provide insights on how various factors affect the optimal level of assortment variety we also develop a formal definition of the level of fashion in a category using the theory of majorization and examine its implications for category profits

endogenous availability in search equilibrium bargaining power by shopping at two firms and then bringing those firms into competition with one another knowing this firms adjust quoted prices to keep customers from exercising this option we compare equilibrium prices and availability firm profits and customer welfare under duopoly with those that would obtain under monopoly wefind that for low levels of exogenous customer search costs duopolists provide lower prices and lower availability while for high customer search costs duopolists provide the same price but greater availability than would a monopolist

technology transfer and public policy a review of research and theory abstract my purpose is to review synthesize and criticize the voluminous multidisciplinary literature on technology transfer to reduce the literature to manageable proportions i focus chiefly not exclusively on recent literature on domestic technology transfer from universities and government laboratories i begin by examining a set of fundamental conceptual issues especially the ways in which the analytical ambiguities surrounding technology transfer concepts affect research and theory my literature review follows and i emphasize technology transfer s impact and effectiveness i employ a contingent effectiveness model of technology transfer to organize the literature as the model s name implies it assumes that technology effectiveness can take a variety of forms in addition to examining the more traditional effectiveness criteria those rooted in market impacts the model considers a number of alternative effectiveness criteria including political effectiveness capacity building

evaluating the effectiveness of inter regional trade and storage in malawi s private sector maize markets abstract this paper evaluates the effectiveness of the private sector maize marketing system in malawi using threshold autoregression models two dimensions of maize market performance are evaluated 1 inter regional trade and spatial price transmission and 2 storage and seasonal price relationships in both cases threshold autoregression models which account for nonlinearities predicted by economic theory are applied results indicate that spatial price transmission and seasonal price patterns in private sector maize markets in malawi are generally consistent with long run competitive inter regional trade and storage behavior and that in most cases shocks to long run equilibrium are arbitraged away quickly this suggests the private sector in malawi is generally doing a good job of transporting maize from surplus to deficit regions and smoothing maize consumption between harvests

hotelling s competition with general customer distributions abstract hotelling and his critics assumed uniformly distributed demand in this note the solution is characterized for any distribution f and some propositions follow for any f an equilibrium does not exist if the duopolists are located too closely together but another distribution can be always found for which an equilibrium does exist when we observe duopolies in equilibrium with closer and closer proximity we can expect the density in the area of contention to go up and prices and profits to go down hotelling s known suggestion that any duopolist has an advantage to move his location towards the other and thus creating a tendency for the differentiation to diminish holds whenever an equilibrium exists

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

dynamic price competition with discrete customer choices abstract for many years dynamic pricing has proven to be an effective tool to increase revenue in the airline and other service industries most studies however focused on monopolistic models and ignored the fact that nowadays consumers can easily compare prices on the internet in this paper we develop a game theoretic model to describe real time dynamic price competition between firms that sell substitutable products by assuming the real time inventory levels of all firms are public information we show the existence of nash equilibrium we then discuss how a firm can adapt if it knows only the initial but not the real time inventory levels of its competitors we compare a firm s expected revenue under different information structures through numerical experiments

pricing and operational recourse in coproduction systems coproduction systems in which multiple products are produced simultaneously in a single production run are prevalent in many industries such systems typically produce a random quantity of vertically differentiated products this product hierarchy enables the firm to fill demand for a lower quality product by converting a higher quality product in addition to the challenges presented by random yields and multiple products coproduction systems often serve multiple customer classes that differ in their product valuations furthermore the sizes of these classes are uncertain employing a utility maximizing customer model we investigate the production pricing downconversion and allocation decisions in a two class stochastic demand stochastic yield coproduction system for the single class case we establish that downconversion will not occur if prices are set optimally in contrast we show that downconversion can be optimal in the two class case even if prices are set optimally we consider the benefit of postponing certain operational decisions e g the pricing or allocation rule decisions until after uncertainties are resolved we use the term recourse to denote actions taken after uncertainties have been resolved we find that recourse pricing benefits the firm much more than either downconversion or recourse allocation do implying that recourse demand management is more valuable than recourse supply management special cases of our model include the single class and two class random yield newsvendor models

yes bait and switch really benefits consumers in our 1990 marketing science paper we demonstrated that a law prohibiting bait and switch may have the surprising consequence of hurting the consumers it was designed to protect wilkie mela and gundlach 1998 postulate that this may be false if up selling is equally effective when the bait brand is available and when it is out of stock we show here that our earlier conclusion is correct in a more general setting a law prohibiting bait and switch in a competitive market can reduce consumer well being but never improve it when bait and switch occurs it creates welfare gains and when it would create welfare losses it does not occur regardless of a law prohibiting the practice