bluuebunny/crossref_metadata_2025 huggingface dataset:
Option Pricing with Stochastic Volatility: Information-Time vs. Calendar-Time
Authors: Chang Carolyn W. , Chang Jack S. K.
Published: November 2008

Empirical evidence has shown that subordinated processes represent well the price changes of stocks and futures. Using either transaction counts or trading volume as a proxy for information arrival, it supports the contention that volatility is stochastic in calendar-time because of random information arrival, and thus becomes stationary in information-time. This contention has also been supported later in theoretical models. In this paper we investigate the implication of this contention to option pricing.

First we price the option in calendar-time where the return of the underlying asset follows a jump subordinated process. We extend Rubinstein's (Rubinstein, M. 1976. The valuation of uncertain income streams and the valuation of options. Bell J. Econom. Management Sci. 7 407–425.) and Ross's (Ross, S. 1989a. Information and volatility: The no-arbitrage martingale approach to timing and resolution irrelevancy. Finance 44 1–17.) martingale valuation methodology to incorporate the pricing of volatility risk. The resulting equilibrium formula requires estimating seven parameters upon implementation. We then make a stochastic time change, from calendar-time to information-time, in order to obtain a stationary underlying asset return process to price the option. We find that the isomorphic option has random maturity because the number of information arrivals prior to the option's calendar-time expiration date is random. We value the option using Dynkin's (Dynkin, E. B. 1965. Markov Processes, Vols. I and II. Springer-Verlag, Berlin and New York.) version of the Feynman-Kac formula that allows for a random terminal date. The resulting information-time formula requires estimating only one additional parameter compared to the Black-Scholes's in practical application. In this regard, the time change has reduced the computational complexity of the option pricing problem. Simulations show that the formula may outperform the Black-Scholes (Black, F., M. Scholes. 1973. The pricing of options and corporate liabilities. Political Econom. 81 637–659.) and Merton (Merton, Robert C. 1976a. Option pricing when underlying stock returns are discontinuous. Financial Econom. 3 125–143.) models in pricing currency options.

As a first attempt to derive valuation relationships in the information-time economy, this investigation may suggest that the information-time approach is a functional alternative to the current calendar-time norm. It is especially suitable for deriving “volatility-free” portfolio insurance strategies.
Optimizing Multinomial Logit Profit Functions
Authors: Hanson Ward , Martin Kipp
Published: November 2008

The multinomial logit model is a standard approach for determining the probability of purchase in product line problems. When the purchase probabilities are multiplied by product contribution margins, the resulting profit function is generally nonconcave. Because of this, standard nonlinear search procedures may terminate at a local optimum which is far from the global optimum. We present a simple procedure designed to alleviate this problem. The key idea of this procedure is to find a “path” of prices from the global optimum of a related, but concave logit profit function, to the global optimum of the true (but nonconcave) logit profit function.
Eliciting von Neumann-Morgenstern Utilities When Probabilities Are Distorted or Unknown
Authors: Wakker Peter , Deneffe Daniel
Published: November 2008

This paper proposes a new method, the (gamble-)tradeoff method, for eliciting utilities in decision under risk or uncertainty. The elicitation of utilities, to be used in the expected utility criterion, turns out to be possible even if probabilities are ambiguous or unknown. A disadvantage of the tradeoff method is that a few more questions usually must be asked to clients. Also, the lotteries that are needed are somewhat more complex than in the certainty-equivalent method or in the probability-equivalent method. The major advantage of the tradeoff method is its robustness against probability distortions and misconceptions, which constitute a major cause of violations of expected utility and generate inconsistencies in utility elicitation. Thus the tradeoff method retains full validity under prospect theory, rank-dependent utility, and the combination of the two, i.e., cumulative prospect theory.

The tradeoff method is tested for monetary outcomes and for outcomes describing life-duration. We find higher risk aversion for life duration, but the tradeoff method elicits similar curvature of utility. Apparently the higher risk aversion for life duration is due to more pronounced deviations from expected utility.
The Impact of Environmental Management on Firm Performance
Authors: Klassen Robert D. , McLaughlin Curtis P.
Published: November 2008

Environmental management has the potential to play a pivotal role in the financial performance of the firm. Many individuals suggest that profitability is hurt by the higher production costs of environmental management initiatives, while others cite anecdotal evidence of increased profitability. A theoretical model is proposed that links strong environmental management to improved perceived future financial performance, as measured by stock market performance. The linkage to firm performance is tested empirically using financial event methodology and archival data of firm-level environmental and financial performance. Significant positive returns were measured for strong environmental management as indicated by environmental performance awards, and significant negative returns were measured for weak environmental management as indicated by environmental crises. The implicit financial market valuation of these events also was estimated. Cross-sectional analysis of the environmental award events revealed differences for first-time awards and between industries. First-time award announcements were associated with greater increases in market valuation, although smaller increases were observed for firms in environmentally dirty industries, possibly indicative of market skepticism. This linkage between environmental management and financial performance can be used by both researchers and practitioners as one measure of the benefits experienced by industry leaders, and as one criterion against which to measure investment alternatives.
Mixed 0-1 Programming by Lift-and-Project in a Branch-and-Cut Framework
Authors: Balas Egon , Ceria Sebastián , Cornuéjols Gérard
Published: November 2008

We investigate the computational issues that need to be addressed when incorporating general cutting planes for mixed 0-1 programs into a branch-and-cut framework. The cuts we use are of the lift-and-project variety. Some of the issues addressed have a theoretical answer, but others are of an experimental nature and are settled by comparing alternatives on a set of test problems. The resulting code is a robust solver for mixed 0-1 programs. We compare it with several existing codes. On a wide range of test problems it performs as well as, or better than, some of the best currently available mixed integer programming codes.
Scheduling Parallel Manufacturing Cells with Resource Flexibility
Authors: Daniels Richard L. , Hoopes Barbara J. , Mazzola Joseph B.
Published: November 2008

This paper investigates the improvements in manufacturing performance that can be realized by broadening the scope of the production scheduling function to include both job sequencing and processing-time control through the deployment of a flexible resource. We consider an environment in which a set of jobs must be scheduled over a set of parallel manufacturing cells, each consisting of a single machine, where the processing time of each job depends on the amount of resource allocated to the associated cell. Two versions of the problem are introduced: a static problem in which a single resource-allocation decision is made and maintained throughout the production horizon, and a dynamic problem in which resource can be reassigned among the production cells as local bottlenecks shift. We provide mathematical formulations for each version of the problem, establish problem complexity, identify important characteristics of optimal solutions, develop optimal and heuristic solution approaches, and report the results of a set of computational experiments. The computational results demonstrate that substantial improvements in operational performance can be achieved through effective utilization of resource flexibility.
An Integer Programming Approach to the Bandwidth Packing Problem
Authors: Park Kyungchul , Kang Seokhoon , Park Sungsoo
Published: November 2008

We consider the bandwidth packing problem arising from telecommunication networks. The problem is to determine the set of calls and an assignment of them to the paths in an arc-capacitated network to maximize profit. We propose an algorithm to solve the integer programming formulation of the problem. An efficient column generation technique to solve the linear programming relaxation is proposed, and a modified cover inequality is used to strengthen the IP formulation. The algorithm incorporates the column generation technique and the strong cutting plane approach into a branch-and-bound scheme. We test the proposed algorithm on some random problems. The results show that the algorithm can be used to solve the problems within reasonably small time limits.
Measurement Errors in Probability Judgments
Authors: Ofir Chezy , Reddy Srinivas K.
Published: November 2008

This paper investigates the psychometric properties of three measures of subjective uncertainty—a zero-to-hundred subjective probability scale and two seven point rating scales. Individual level analysis applied to data obtained from two separate studies suggests that the scales produce fairly similar results: The inter-response mode correlations were high, and individual plots comparing various methods were quite similar. Covariance structure models based on multitrait-multimethod matrices are utilized to assess the reliability and method variance of the scales. The cumulative evidence suggests that rating scales are consistently just as reliable as the subjective probability scale. The probability scale contained significant method error. In fact, the two rating scales were found to have lower systematic method variance and lower random error variance than the subjective probability scale. The paper concludes with a discussion regarding possible explanations of these results and directions for future research.
The Joint Effect of Leadtime Variance and Lot Size in a Parallel Processing Environment
Authors: Song Jing-Sheng , Zipkin Paul H.
Published: November 2008

We study a basic (r, q) system, in which the demand is a Poisson process and the leadtimes are independent, identically-distributed random variables. The key issue is the joint effect of the leadtime variance and the lot size q on performance. We know that, under a simple base-stock policy (with q = 1), the leadtime variance has no effect at all. We find here that, for larger q, the leadtime variance can have a significant adverse impact on performance.

To explore this effect, we test two simple approximations. The simplest ignores the leadtime variance. The second approach is only a bit more complex; it captures the variance effect through a hybrid of two limiting approximations. Both methods provide useful information, but the second is more robust.
Remarks on: “Some Extensions of the Discrete Lotsizing and Scheduling Problem”
Authors: Bruggemann Wolfgang , Jahnke Hermann
Published: November 2008

Saloman et al. (Salomon, M., L. G. Kroon, R. Kuik, L. N. Van Wassenhove. 1991. Some extensions of the discrete lotsizing and scheduling problem. Management Sci. 37 801–812.) claim the NP-completeness of different variants of the discrete lot-sizing and scheduling problem (DLSP) which are differentiated by using a six-field notation. However, some of the given proofs are incorrect because the transformations employed map certain data values of the preimage problem to the number of data in the resulting instance and are hence not polynomial. As an example, we concentrate here on the 1/*/SI/G/A-optimization problem (Salomon et al. [Salomon, M., L. G. Kroon, R. Kuik, L. N. Van Wassenhove. 1991. Some extensions of the discrete lotsizing and scheduling problem. Management Sci. 37 801–812.], Theorem 3). Similar arguments pertain to the 1/*/A/G/SI-DLSP, too.
Quality, Class, and Competition
Authors: Karmarkar Uday S. , Pitbladdo Richard C.
Published: November 2008

This paper integrates the process oriented view of quality in manufacturing with the multi-attribute product positioning and customer preference models of marketing, within the context of traditional economic models of markets and competition. In manufacturing applications, “quality” is often defined as conformance to specifications or as meeting standards on the performance of the product. In the marketing and economics literature, “quality” typically refers to the performance level or “class” of the product. To capture both perspectives, a product is described by a vector of performance attributes, and the population of produced units is assumed to display a distribution on these attributes. The distribution perceived by customers may differ from the actual. The attribute levels (means) may be taken to define the class, or performance of the product. Quality in the sense of conformance is then conceptually identified with the absence of variation of the population. Consumer preferences are modelled by a cardinal utility function defined on the vector of attributes and price, and customers maximize expected utility. Product manufacturers are assumed to face a cost of producing a given population distribution. Under specific assumptions regarding costs and utility functions, models of monopoly, oligopoly and perfect competition are formulated. The model clarifies the distinction between product class (performance) and conformance quality, identifies the sources of quality improvement, and provides an economic framework relating issues like product positioning, process improvement, quality function deployment (QFD) and customer preference estimation. This framework is used to address issues such as quality costs and benefits and the economics of investments in quality.
Closed-Loop Advertising Strategies in a Duopoly
Authors: Fruchter Gila E. , Kalish Shlomo
Published: November 2008

Using the Lanchester model to describe the dynamics of the market where two firms compete for customers by advertising, we solve the problem of determining an optimal advertising strategy for maximum discounted profits. We develop both open- and closed-loop strategies and explain the relationship between them. Using a new mathematical approach, we prove that our closed-loop solution is a global Nash equilibrium. The closed-loop strategy is time-variant and depends linearly on the actual market share. The time-variant coefficient incorporates the discount factor, its computation requires the solution of a backward differential equation and a set of two nonlinear differential equations for an initial value problem. The closed-loop advertising expenditures are proportional to the open-loop advertising expenditures and to the square of the competitor's actual market share. This provides a very practical adaptive control rule that allows the manager to adjust the actual advertising expenditure and to deviate from budget. We illustrate the use of our control rule, using data for the period 1968–1984 of the Cola War Marketing implications of the results are provided.
Metrics for Managing Research and Development in the Context of the Product Family
Authors: Meyer Marc H. , Tertzakian Peter , Utterback James M.
Published: November 2008

The paper proposes methods to measure the performance of research and development in new product development. We frame these measures in the context of evolving product families in the technology-based firm. Our goal is to more clearly understand the dynamics of platform renewal and derivative product generation and their consequences for long-term success.

We explore the utility of the proposed methods with data gathered from a large measurement systems manufacturer. We find that the methods and measures can help management assess the technological and market leverage achieved from the firm's present and past product platforms. This provides a foundation for transforming single-product, single-period planning processes into a multi-product, multi-period form that embraces the product family and the renewal of product architecture. The research also shows the need to integrate data from engineering, manufacturing, and sales organizations to produce information for managing the growth of the firm's product families.
Advertising Fee in Business-Format Franchising
Authors: Desai Preyas S.
Published: November 2008

Most franchisors charge an advertising fee in addition to the better known royalty and franchise fee. We study the role of the advertising fee in improving channel coordination. We begin our analysis with a simple case of one franchisor dealing with two identical franchisees and find that the advertising fee allows the franchisor to commit to a specific level of advertising spending at the time of contract acceptance. We also find that the lump-sum advertising fee is better than the sales-based advertising fee. These results are intriguing because most franchisors use the sales-based advertising fee. We show that when franchisees' markets differ in how advertising affects sales, the franchisor may prefer the sales-based advertising fee. There are two reasons for the higher profitability of the sales-based advertising fee. First, the sales-based advertising fee conditions the franchisor's advertising decision on the franchisees' price and service decisions, and induces them to make better price and service decisions. The second reason is that with heterogeneous franchisees, using the sales-based advertising fee does not increase the total sales-based component in the fee structure. These results also hold when the franchisor pledges to contribute a matching fraction of the advertising fee to the advertising fund.
Revised-Modified Penalties for Fixed Charge Transportation Problems
Authors: Lamar Bruce W. , Wallace Chris A.
Published: November 2008

Conditional penalties are used to obtain lower bounds to subproblems in a branch-and-bound procedure that can be tighter than the LP relaxation of the subproblems. For the fixed charge transportation problem (FCTP), branch-and-bound algorithms have been implemented using conditional penalties proposed by Driebeek (Driebeek, N. 1966. An algorithm for the solution of mixed integer programming problems. Management Sci. 12 576–587.), Cabot and Erenguc (Cabot, A. V., S. S. Erenguc. 1984. Some branch-and-bound procedures for fixed-cost transportation problems. Naval Res. Logistics 31 145–154.), and Palekar et al. (Palekar, V. S., M. H. Karwan, S. Zionts. 1990. A branch-and-bound method for the fixed charge transportation problem. Management Sci. 36 1092–1105.). The last conditional penalties are referred to as the “modified” penalties. In this paper, we show that the modified penalties are not valid conditional penalties. In fact, in nearly a quarter of the test problems examined, the modified penalties prevented the branch-and-bound algorithm from properly identifying the optimal solution to the FCTP. A simple change, which corrects a subcase in the penalty calculation, restores the validity of the modified penalties while retaining their efficiency. Computational tests indicate that the “revised-modified” penalties continue to dominate the Driebeek and the Cabot and Erenguc penalties.
Note. Periodic Review (s, S) Policies for Joint Replenishment Inventory Systems
Authors: Viswanathan S.
Published: November 2008

This note deals with the joint replenishment problem with stochastic demands. A new class of policies called P(s, S) policy is proposed for this problem. The proposed policy uses independent, periodic review (s, S) policies for each item. Results on test problems show that the proposed policy is superior to other classes of policies for the problem.
Comments on “Fortune Favors the Prepared Firm”
Authors: Joglekar Prafulla , Bohl Alan Harrison , Hamburg Morris
Published: November 2008

A recent paper in Management Science titled “Fortune Favors the Prepared Firm” (Cohen and Levinthal [Cohen, W. M., D. A. Levinthal. 1994. Fortune favors the prepared firm. Management Sci. 40(2) 227–251.]) is a pioneering work insofar as it introduces the concept of a firm's absorptive capacity—the ability to evaluate, assimilate, and exploit extramural technological developments. We appreciate the paper's extensive qualitative discussion of the nature and role of absorptive capacity. We also commend the authors' idea of constructing a mathematical model to analyze a rational firm's incentives for an investment in absorptive capacity. However, we find that the authors' model overlooks one key element of a firm's absorptive capacity, namely, the firm's ability to defend itself against the threat of an external technology. In the absence of that element, the authors' model may be able to explain a firm's incentives for an innovation rather than incentives for the development of an absorptive capacity. We also identify several internal inconsistencies in the authors' mathematical model. For example, the assumed profit maximization function seems inconsistent with the assumed degree of sophistication of the firm's probability assessment behavior. We believe that the inconsistencies and shortcomings noted here raise serious questions about the validity of the authors' findings. However, we hope that this note does not detract from the pioneering nature of the authors' work, but instead increases its value by stimulating further work on the important topic of absorptive capacity.
Backup Agreements in Fashion Buying—The Value of Upstream Flexibility
Authors: Eppen Gary D. , Iyer Ananth. V.
Published: November 2008

We focus on backup agreements between a catalog company and manufacturers—a scheme to provide upstream sourcing flexibility for fashion merchandise. A backup agreement states that if the catalog company commits to a number of units for the season, the manufacturer holds back a constant fraction of the commitment and delivers the remaining units before the start of the fashion season. After observing early demand, the catalog company can order up to this backup quantity for the original purchase cost and receive quick delivery but will pay a penalty cost for any of the backup units it does not buy. In representative contracts with five companies, the fraction held as backup varies from 20% to 33% and the penalty ranges from 0 to 20% of cost. We model this inventory problem and derive the optimal solution. We provide results from a retrospective parallel test of the model against buyer decisions in 1993 based on a data set from the women's fashion department at a catalog company (Catco). The results indicate that backup arrangements can have a substantial impact on expected profits and may result in an increase in the committed quantity. Also, these arrangements may maintain the manufacturer's expected profit for a wide range of parameters.
Catching the Wave: Alertness, Responsiveness, and Market Influence in Global Electronic Networks
Authors: Zaheer Akbar , Zaheer Srilata
Published: November 2008

This paper introduces the concepts of alertness and responsiveness as key capabilities for firms in fast-moving, information-intensive environments such as global currency trading. Hypotheses drawn from the resource-based view of the firm, from network theory, and from Austrian economics are tested on objective cross-section and time-series data for the population of 4,088 banks engaged in foreign-exchange trading on the Reuters dealing system. Results strongly support the hypotheses that banks that are alert, i.e., use their information networks in ways that expand the range of information they are exposed to, and responsive—those that act quickly in volatile markets—tend to exercise greater market influence in this industry.
Autocorrelated Returns and Optimal Intertemporal Portfolio Choice
Authors: Balvers Ronald J. , Mitchell Douglas W.
Published: November 2008

In recent years it has been shown empirically that stock returns exhibit positive or negative autocorrelation, depending on observation frequency. In this context of autocorrelated returns the present paper is the first to derive an explicit analytical solution to the dynamic portfolio problem of an individual agent saving for retirement (or other change of status, like the purchase of a house or starting college). Using a normal ARMA(1,1) process, dynamic programming techniques combined with the use of Stein's Lemma are employed to examine “dollar-cost-averaging” and “age effects” in intertemporal portfolio choice with CARA preferences. We show that with a positive moving average parameter and positive riskfree rates, if first-order serial correlation is nonnegative, then the expected value of the optimal risky investment is increasing over time, while if first-order serial correlation is negative this path can be increasing or decreasing over time. Thus a necessary but not sufficient condition to obtain the conventional age effect of increasing conservatism over time is that first-order serial correlation be negative. Further, dollar-cost averaging in the general sense of gradual entry into the risky asset does not emerge as an optimal policy. Simulation results for U.S. data are used to illustrate optimal portfolio paths.
Habits and the Anomalies in Intertemporal Choice
Authors: Wathieu Luc
Published: November 2008

This paper analyzes a model of discounted utility under habit formation. Habit formation means that utility in each period is determined by the difference between the received outcome and the customary outcome at that point in time. Preferences are rational, in the sense that the decision maker correctly anticipates the habit formation process and behaves in a dynamically consistent manner, i.e., plans are truly carried out. The purpose is to demonstrate that this generalization of the discounted utility model accounts, jointly and in a meaningful way, for the most striking anomalies with respect to classical discounted utility theory. The common difference effect is explained first. This effect, also called decreasing impatience effect, has usually been viewed as evidence against exponential discounting. Then, the frequently observed preference for increasing sequences of outcomes is examined. Such preference, under the traditional discounted utility model, would be regarded as a paradoxical case of negative discounting. A discussion of the descriptive, prescriptive, and normative values of the model is included.
Information and Organization for Horizontal Multimarket Coordination
Authors: Anand Krishnan S. , Mendelson Haim
Published: November 2008

We model the effects of alternative coordination structures on the performance of a firm that faces uncertain demand in multiple horizontal markets. The firm's coordination structure is jointly determined by its decision-rights structure and by its information structure. We compare the performance of decentralized, centralized and distributed structures and study factors that affect the value of coordination. The results quantify and illustrate the value of co-locating decision rights with specific knowledge.
Managing a Distribution Channel Under Asymmetric Information with Performance Requirements
Authors: Desiraju Ramarao , Moorthy Sridhar
Published: November 2008

In this paper we study how performance requirements may improve the working of a distribution channel when the retailer is better informed about demand conditions than the manufacturer. Performance requirements means that the manufacturer and retailer agree to (1) have the manufacturer set requirements on retail price or service or both, and (2) jointly invest in the information systems required to monitor the retailer’s compliance with the requirements. We show that performance requirements on price and service will improve channel performance. But if requirements cannot be set on both performance dimensions, the choice among the remaining options is not straightforward. Price requirements may be worse than no requirements, and service requirements no better. The central problem with setting requirements on only one dimension is that the retailer then behaves suboptimally on the other. Between the two partial options, service requirements are better than price requirements in aligning the interests of the manufacturer and the retailer, whereas price requirements are better at inducing the retailer to reveal his demand.
Reducing Buyer Search Costs: Implications for Electronic Marketplaces
Authors: Bakos J. Yannis
Published: November 2008

Information systems can serve as intermediaries between the buyers and the sellers in a market creating an “electronic marketplace” that lowers the buyers' cost to acquire information about seller prices and product offerings. As a result, electronic marketplaces reduce the inefficiencies caused by buyer search costs, in the process reducing the ability of sellers to extract monopolistic profits while increasing the ability of markets to optimally allocate productive resources. This article models the role of buyer search costs in markets with differentiated product offerings. The impact of reducing these search costs is analyzed in the context of an electronic marketplace, and the allocational efficiencies such a reduction can bring to a differentiated market are formalized. The resulting implications for the incentives of buyers, sellers, and independent intermediaries to invest in electronic marketplaces are explored. Finally, the possibility to separate price information from product attribute information is introduced, and the implications of designing markets promoting competition along each of these dimensions are discussed.
Contracting Structures for Custom Software Development: The Impacts of Informational Rents and Uncertainty on Internal Development and Outsourcing
Authors: Wang Eric T. G. , Barron Terry , Seidmann Abraham
Published: November 2008

Custom software development projects have special informational attributes that have challenged managers for many years: they are associated with information asymmetries regarding user valuation and developer costs, relationship-specific investments, and a resulting likelihood of positive externalities for the user or the developer from the other party's investment. Furthermore, in a custom project, market prices for software are not helpful in solving either the valuation or the cost problems. In this paper we analyze the unique nature of the software development agreements that can be reached between the user and the developer in such a setting. We compare the value of using internal and external developers, with the goal of better understanding the factors relevant to the outsourcing decision. For internal development, we derive a new mechanism that achieves the first-best system whenever the project has positive expected net value, while achieving ex ante budget balance. In contrast, the optimal mechanism for an external developer will not in general yield the first-best system. This implies that when internal and external developers have identical cost functions, internal development definitely yields the larger net value. More generally, this implies that an external developer must have considerable cost advantages over an internal developer in order to have the larger net value. Numerical results indicate that this difference in net values can be very large, as much as a 100% increase for internal development over external development. This is consistent with the strong bias in favor of internal custom development found in recent empirical studies. We also explain why the efficient levels of investment can be achieved only when there are no externalities, and we show that the presence of positive externalities results in underinvestment. Since using an external developer will typically yield a system that is not first-best, inefficient investments result with or without externalities. We present examples showing that uncertainty about system value is not a significant factor in choosing between internal and external development. However, uncertainty about the development costs is highly significant, with greater uncertainty making outsourcing less attractive.
An Optimal Policy for a Two Depot Inventory Problem with Stock Transfer
Authors: Archibald T. W. , Sassen S. A. E. , Thomas L. C.
Published: November 2008

Multiple depot inventory systems with stock transfer are used by many companies especially when demand is high relative to storage capacity. The key issues in such systems are how many of each item to hold at each depot and what to do if there is a demand for an item at a depot that has none of that item in stock. This study was motivated by the inventory problem faced by a UK car part retailer that groups its depots into pairs. The company's policy for dealing with a demand at a depot that cannot be satisfied from local stock is to either transfer the item from the other depot in the group or to place an emergency order. The object of this paper is to characterise an optimal policy for this problem and to propose a method of calculating the parameters of such a policy.
A Stochastic Version of a Stackelberg-Nash-Cournot Equilibrium Model
Authors: De Wolf Daniel , Smeers Yves
Published: November 2008

We consider a stochastic version of the Stackelberg-Nash-Cournot model proposed by Murphy et al. (Murphy, F. H., H. D. Sherali, A. L. Soyester. 1983. Stackelberg-Nash-Cournot equilibria characterizations and computations. Oper. Res. 31 253–276.). In the first stage, the leader chooses and announces his production level taking into account the reaction of the followers. The decision of the leader is taken when market demand is uncertain. In the second stage, the followers, knowing the leader's output, react to this level according to the Cournot assumption. At this stage, demand is known. We study the extension of the Murphy et al. model and give a numerical illustration of this model using the European gas market.
Decreasing Absolute Risk Aversion and Option Pricing Bounds
Authors: Basso Antonella , Pianca Paolo
Published: November 2008

In this paper efficient bounds for the price of a call option are obtained using the decreasing absolute risk aversion (DARA) dominance rule. Such lower and upper bounds are obtained minimizing and maximizing, respectively, the objective function of a nonlinear optimization problem. An explicit formula (related to an exponential utility function) is given for the special case of three states of nature.

A large number of experiments have been carried out and the numerical results support the conjecture that the same formula holds for problems with a number of states n < 3. Moreover, DARA bounds are more efficient than the bounds obtained using different criteria.
Organizational Response: The Cost Performance Tradeoff
Authors: Lin Zhiang , Carley Kathleen M.
Published: November 2008

Organizations constantly face a dynamic environment where they must respond both quickly and accurately in order to survive. In this paper, we examine the issue: do organizations need to employ costly designs in order to exhibit high performance in a dynamic situation. In the context of a computational framework we derive a set of logically consistent propositions about the interrelationship among task, opportunities for review, training, and cost and their relative impact on organizational performance. Our analyses indicate that complex organizational designs have drawbacks and design is often not the dominant factor affecting performance. The relationship between organizational complexity (hence cost) and performance is complex and depends on the level of time pressure, training, and the task environment. Within the context of the computational framework, we find that the benefits of re-thinking decisions and of matching the organizational design to the task environment are questionable. Further, these results suggest that applying scarce resources to mitigate the adverse impact of time pressure may have more impact on performance than using those resources to support a more complex organizational design.
Breeding Competitive Strategies
Authors: Midgley David F. , Marks Robert E. , Cooper Lee C.
Published: November 2008

We show how genetic algorithms can be used to evolve strategies in oligopolistic markets characterized by asymmetric competition. The approach is illustrated using scanner tracking data of brand actions in a real market. An asymmetric market-share model and a category-volume model are combined to represent market response to the actions of brand managers. The actions available to each artificial brand manager are constrained to four typical marketing actions of each from the historical data. Each brand's strategies evolve through simulations of repeated interactions in a virtual market, using the estimated weekly profits of each brand as measures of its fitness for the genetic algorithm. The artificial agents bred in this environment outperform the historical actions of brand managers in the real market. The implications of these findings for the study of marketing strategy are discussed.
Integrating Routing and Inventory Decisions in One-Warehouse Multiretailer Multiproduct Distribution Systems
Authors: Viswanathan S. , Mathur Kamlesh
Published: November 2008

We consider distribution systems with a central warehouse and many retailers that stock a number of different products. Deterministic demand occurs at the retailers for each product. The warehouse acts as a break-bulk center and does not keep any inventory. The products are delivered from the warehouse to the retailers by vehicles that combine the deliveries to several retailers into efficient vehicle routes. The objective is to determine replenishment policies that specify the delivery quantities and the vehicle routes used for the delivery, so as to minimize the long-run average inventory and transportation costs. A new heuristic that develops a stationary nested joint replenishment policy for the problem is presented in this paper. Unlike existing methods, the proposed heuristic is capable of solving problems involving distribution systems with multiple products. Results of a computational study on randomly generated single-product problems are also presented.
Replenishment and Stocking Policies for Inventory Systems with Random Deal Offerings
Authors: Moinzadeh Kamran
Published: November 2008

This paper considers the replenishment and stocking decision for inventory systems in which price discounts, referred to as deals, are offered by the supplier (or the market place) at random points in time. Assuming that the demand is constant over time, the times between deal offerings are exponentially distributed and that the order leadtimes are negligible, we derive expressions for evaluating the operating characteristics of the model. Moreover, we derive expressions for determining the optimal policy parameters for such systems and present results on the behavior of the optimal policy parameters. Our results are easy to implement, intuitive and provide managerial insights and a better understanding on the effect of random deal offerings on replenishment and stocking decisions. In addition, we suggest a back of envelope heuristic solution for deriving the policy parameters.
The Relationship Between a Firm's Level of Technological Innovativeness and Its Pattern of Partnership Agreements
Authors: Dutta Shantanu , Weiss Allen M.
Published: November 2008

In this paper we investigate the relationship between the level of a firm's technological innovativeness and its pattern of partnership agreements (i.e., relative number of partnership agreements of one type versus another). We argue that the protection of tacit technological knowledge from potential opportunism is of importance to technologically innovative firms, and as a result they tend to have a relatively larger number of partnership agreements which generally minimize the transfer of tacit technological knowledge. Specifically, they tend to have a greater number of marketing agreements than joint ventures and a greater number of licensing agreements than joint ventures. This argument is tested using data from manufacturing firms in the electrical and electronics machinery sector who invest in R&D, and our results hold for our focal firm's agreements with both domestic and foreign partners. We discuss the strategic and policy implications from this research. In particular, the empirical results suggest that technologically innovative firms already have relatively more agreements which are likely to preempt transfer of their tacit technological knowledge to their foreign partners. Thus, recent suggestions of more active government regulation in the area of intellectual property may be unwarranted.
The Relationship Between Risk Attitude and Strength of Preference: A Test of Intrinsic Risk Attitude
Authors: Smidts Ale
Published: November 2008

In a field study, the concept of intrinsic risk attitude is investigated. Intrinsic risk attitude concerns the relationship between risk attitude, measured by the utility function u(x), and strength of preference, measured by the value function v(x). We study farmers' decision-making vis-à-vis price risk and obtain assessments of risk attitude and strength of preference in two consecutive years in a sample of 253 respondents. This design enables us to investigate the temporal stability of intrinsic risk attitude. Our findings show that risk attitude and strength of preference are two distinctive constructs. More specifically, the hypothesis of a linear relationship between u(x) and v(x) is clearly rejected in favor of an exponential relationship. This exponential relationship implies that our respondents exhibit a constant absolute intrinsic risk attitude for different price levels, during a time period. Differences between respondents in direction and degree of intrinsic risk attitude are substantial and the majority of the respondents are intrinsically risk seeking. No statistically significant change in intrinsic risk attitude could be detected between the two years of measurement. However, the correlation between measures across time appears to be low. In the discussion, issues for further research are identified.
Firm Asymmetries and Sequential R&D: Theory and Evidence from the Mainframe Computer Industry
Authors: Khanna Tarun , Iansiti Marco
Published: November 2008

We incorporate strategic considerations into the analysis of a problem that has hitherto been treated in a decision theoretic fashion: the allocation of scarce R&D resources when R&D proceeds in stages. In doing so, we formalize a notion of “system complexity” and investigate its implications for the allocation of these scarce resources. Using detailed data from fieldwork at all mainframe manufacturers in the world to investigate our theoretical predictions, we provide evidence that larger market share firms set more aggressive stage targets, as do more resource-rich firms. Our results can be seen as a verification of the mechanism underlying Arrow's “replacement” effect.
New Product Development Structures and Time-to-Market
Authors: Datar Srikant , Jordan Clark , Kekre Sunder , Rajiv Surendra , Srinivasan Kannan
Published: November 2008

In fast-cycle, high technology industries, the speed and rate at which companies can introduce products into the market are critical for sustaining competitive advantage and market share. The authors analyze new product development by three international manufacturers that dominate a segment of the electronic component industry. The objective is to examine the impact of two distinct product development strategies and structures on time-to-market.

The analysis of more than 200 new product developments provides important findings. A concentrated new product development structure, in contrast to a distributed structure, affords rapid prototyping. However, volume production is reached faster in the distributed structure. Also, devoting more time to prototyping hastens volume production.
The Road to “Root Cause”: Shop-Floor Problem-Solving at Three Auto Assembly Plants
Authors: MacDuffie John Paul
Published: November 2008

This paper uses case studies of shop-floor problem-solving at three automotive assembly plants to examine organizational influences on process quality improvement. Three complex quality problems—water leaks, paint defects, and electrical defects—were chosen because they are universally found in assembly plants, have multiple sources, and can only be resolved with high levels of interaction and coordination among individuals in multiple departments or functional groups. The case studies focus particularly on the early stages of the problem-solving process—problem definition, problem analysis, and the generation of solutions—emphasizing how each plant tries to identify the “root cause” of defects.

The paper then explores consistencies and contrasts within and across the three cases to analyze the factors underlying effective shop-floor problem-solving. Central to this analysis is the idea that successful process quality improvement depends heavily on how the organization influences the cognitive processes of its members. Problem-solving processes benefit from rich data that capture multiple perspectives on a problem, problem categories that are “fuzzy”, and organizational structures that facilitate the development of a common language for discussing problems. Also, when problems are framed as opportunities for learning, the combination of positive attributions that boost motivation and the suppression of threat effects can improve the effectiveness of improvement activities. Finally, when process standardization is understood as marking the beginning (and not the end) of further improvement efforts, the normal inertial tendencies of organizations with respect to adaptive learning can be partially overcome.
Unanticipated Side Effects of Successful Quality Programs: Exploring a Paradox of Organizational Improvement
Authors: Sterman John D. , Repenning Nelson P. , Kofman Fred
Published: November 2008

Recent evidence suggests the connection between quality improvement and financial results may be weak. Consider the case of Analog Devices, Inc., a leading manufacturer of integrated circuits. Analog's TQM program was a dramatic success. Yield doubled, cycle time was cut in half, and product defects fell by a factor of ten. However, financial performance worsened. To explore the apparent paradox we develop a detailed simulation model of Analog, including operations, financial and cost accounting, product development, human resources, the competitive environment, and the financial markets. We used econometric estimation, interviews, observation, and archival data to specify and estimate the model. We find that improvement programs like TQM can present firms with a tradeoff between short and long run effects. In the long run TQM can increase productivity, raise quality, and lower costs. In the short run, these improvements can interact with prevailing accounting systems and organizational routines to create excess capacity, financial stress, and pressure for layoffs that undercut commitment to continuous improvement. We explore policies to promote sustained improvement in financial as well as nonfinancial measures of performance.