bluuebunny/crossref_metadata_2025 huggingface dataset:
Incentive-Compatible Pricing for a Service Facility with Joint Production and Congestion Externalities
Authors: Ha Albert Y.
Published: November 2008

This paper considers the pricing problem of a service facility when services are jointly produced by the customers and the facility. Building on the work of Mendelson (1985), we model the facility as a GI/GI/1 queue with customer-chosen service rates and linear delay costs. We show that the service rates chosen by the customers, based on their self-interest, are always suboptimal for the facility due to congestion externalities. We derive optimal incentive-compatible pricing schemes that can achieve optimal arrival rates and induce customers to choose optimal service rates. For the case of systemwide net-value maximization, we show that the optimal incentive-compatible pricing scheme consists of a variable fee that is proportional to the actual service time and a fixed rebate that is equal to a customer's expected delay cost in the queue. For the case of profit maximization of the facility, we show that the optimal pricing scheme again consists of a fixed fee and a variable fee. One insight from our analysis is that it may be appropriate for a service facility to reimburse each customer for his actual delay cost in the queue.
Financial Data and the Skewed Generalized T Distribution
Authors: Theodossiou Panayiotis
Published: November 2008

This paper develops a skewed extension of the generalized t (GT) distribution, introduced by McDonald and Newey (1988). In particular, the paper derives the mathematical moments and other properties of the distribution and assesses its ability to fit the empirical distribution of several financial series characterized by skewness and excess kurtosis. In all cases the skewed GT provides an excellent fit to the empirical distribution of data.
Incentive Effects Favor Nonconsolidating Queues in a Service System: The Principal–Agent Perspective
Authors: Gilbert Stephen M. , Weng Z. Kevin
Published: November 2008

In this paper, we study a service network in which an agency is responsible for satisfying a constraint on the expected waiting and service time experienced by customers. However, the agency does not render the actual service. Instead, it serves to coordinate independently operated facilities. The coordinating agency must devise a strategy for allocating compensation and customers to the self-interested operators in order to minimize its own costs. For a network of two facilities, we model the facilities' self-interested capacity decisions as the solution to a game. Using this analytical framework, we compare two types of customer allocation: one from a common queue, and one from separate queues. Our analysis shows that it can be in the best interest of the coordinating agency to adopt a separate queue allocation scheme instead of one based on a common queue. Although doing so sacrifices risk-pooling benefits, these can be more than offset by the stronger incentives that are created for the independent facilities.
Research, Development, and Engineering Metrics
Authors: Hauser John R.
Published: November 2008

We seek to understand how the use of Research, Development, and Engineering (R,D&E) metrics can lead to more effective management of R,D&E. This paper combines qualitative and quantitative research to understand and improve the use of R,D&E metrics. Our research begins with interviews of 43 representative Chief Technical Officers, Chief Executive Offices, and researchers at 10 research-intensive international organizations. These interviews, and an extensive review of the literature, provide qualitative insights. Formal mathematical models attempt to explore these qualitative insights based on more general principles.

Our research suggests that metrics-based evaluation and management vary according to the characteristics of the R,D&E activity. For applied projects, we find that project selection can be based on market-outcome metrics when firms use central subsidies to account for short-termism, risk aversion, and scope. With an efficient form of subsidies known as “tin-cupping,” the business units have the incentives to choose the projects that are in the firm's best long-term interests. For core-technological development, longer time delays and more risky programs imply that popular R,D&E effectiveness metrics lead researchers to select programs that are not in the firm's long-term interest. Our analyses suggest that firms moderate such market-outcome metrics by placing a larger weight on metrics that attempt to measure research effort more directly. These metrics include standard measures such as publications, citations, patents, citations to patents, and peer review. For basic research, the issues shift to getting the right people and encouraging a breadth of ideas. Unfortunately, metrics that identify the “best people” based on research success lead directly to “not-invented-here” behaviors. Such behaviors result in research empires that are larger than necessary, but lead to fewer ideas. We suggest that firms use “research tourism” metrics, which encourage researchers to take advantage of research spillovers from universities, other industries, and, even, competitors.
Evaluating Income Streams: A Decision Analysis Approach
Authors: Smith James E.
Published: November 2008

Most important decision problems—virtually all capital investments and planning situations—involve risky cash flows with uncertainties that are resolved over time. In most of these problems, the decision-maker has access to financial markets and may borrow and lend to smooth consumption over time. Yet, because of the difficulty of incorporating these borrowing and lending decisions into the evaluation models, these opportunities are rarely explicitly modeled in decision and risk analyses of these investments. In this paper, we study the errors induced by failing to account for these borrowing and lending decisions, and we develop extensions to the standard decision and risk analysis procedures that, given certain market and preference assumptions, take these borrowing and lending opportunities into account without overburdening the evaluation models.
Rational Shopping Behavior and the Option Value of Variable Pricing
Authors: Ho Teck-Hua , Tang Christopher S. , Bell David R.
Published: November 2008

When a product's price fluctuates at a store, how should rational, cost-minimizing shoppers shop for it? Specifically, how frequently should they visit the store, and how much of the product should they buy when they get there? Would this rational shopping behavior differ across Every Day Low Price (EDLP) and Promotional Pricing (HILO) stores? If shoppers are rational, which retail price format is more profitable, EDLP or HILO? To answer these questions, we develop a normative model that shows how rational customers should shop when the price of the product is random.

We derive a closed-form expression for the optimal purchasing policy and show that the optimal quantity to purchase under a given price scenario is linearly decreasing in the difference between the price under that scenario and the average price. This purchase flexibility due to price variability has a direct impact on shopping frequency. Indeed, the benefit of this purchase flexibility can be captured via an “option value” that implicitly reduces the fixed cost associated with each shopping trip. Consequently, rational shoppers should shop more often and buy fewer units per trip when they face higher price variability.

Our results suggest that if two stores charge the same average price for a product, rational shoppers incur a lower level of expenditure at the store with a higher price variability. Since stores with different price variabilities coexist in practice, we expect stores with higher price variability to charge a higher average price. Thus, given two stores, a higher relative mean price for a given item should be indicative of higher price variability, and vice versa.

These model implications are tested using multicategory scanner panel data from 513 households and pricing data for three stores (two EDLP stores and one HILO store) and 33 product categories over a two-year period. We find strong empirical support for the model implications.
Managing Broader Product Lines through Delayed Differentiation Using Vanilla Boxes
Authors: Swaminathan Jayashankar M. , Tayur Sridhar R.
Published: November 2008

In an attempt to reduce cost while maintaining good customer service, some of the leading manufacturers in the computer industry are delaying product differentiation (by exploiting component commonality) while managing broader product lines. In an environment where demands are stochastic, it seems a good strategy to store inventory in the form of semi-finished products (vanilla boxes) that can serve more than one final product. However, finding the optimal configurations and inventory levels of the vanilla boxes could be a challenging task. In this paper, we model the above problem as a two-stage integer program with recourse. By utilizing structural decomposition of the problem and (sub)gradient derivative methods, we provide an effective solution procedure. A special case, a variant, and several extensions are also discussed. In our computational section, we utilize our model to study several new research issues. We provide insights on the effect of demand variance, correlation, and capacity limitations on the optimal configuration and inventory levels of vanilla boxes and the performance of a vanilla assembly process. In addition, we compare the performance of the vanilla assembly process to make-to-stock and assemble-to-order processes and provide managerial insights on the conditions under which one might be better than the others. Finally, we discuss the characteristics of an IBM product line (which motivated this work) and the effectiveness of a heuristic tailored for that application.
The Role of Earnings Information in Corporate Dividend Decisions
Authors: Hsu Jumming , Wang Xu-Ming , Wu Chunchi
Published: November 2008

This paper examines the role of earnings information in the determination of dividend policy. We decompose accounting earnings into permanent and transitory components and postulate that dividend policy is driven by sustainable permanent earnings. Two measures of permanent earnings are proposed. The first is a permanent earnings variable extracted from accounting earnings by a random-level shift ARMA model. The second measure is stock price times cost of capital. These two permanent earnings measures are employed in the Marsh-Merton (1987) model to explain corporate dividend behavior and their performance is compared. A generalized friction method is adopted for empirical estimation to account for stepwise dividend movements over time. Results show that the permanent earnings measure extracted from accounting earnings data explains dividend dynamic behavior better than stock price.
Interfunctional Conflict, Conflict Resolution Styles, and New Product Success: A Four-Culture Comparison
Authors: Xie Jinhong , Song X. Michael , Stringfellow Anne
Published: November 2008

This paper develops a model relating innovation success to the level of interfunctional conflict and conflict resolution methods. The model suggests a concave relationship between performance and the level of interfunctional conflict among marketing, R&D, and manufacturing. It also conjectures that both national culture and the level of interfunctional conflict influence the effectiveness of different conflict resolution methods. An empirical test of the proposed framework involves a survey of 968 marketing managers from Japan, Hong Kong, the United States, and Great Britain. The results provide general support for the model's predictions and reveal several significant cross-national differences.
Optimization of (s, S) Inventory Systems with Random Lead Times and a Service Level Constraint
Authors: Bashyam Sridhar , Fu Michael C.
Published: November 2008

A major assumption in the analysis of (s, S) inventory systems with stochastic lead times is that orders are received in the same sequence as they are placed. Even under this assumption, much of the work to date has focused on the unconstrained optimization of the system, in which a penalty cost for unsatisfied demand is assigned. The literature on constrained optimization, wherein a service level requirement needs to be met, is more sparse. In this paper, we consider the constrained optimization problem, where orders are allowed to cross in time. We propose a feasible directions procedure that is simulation based, and present computational results for a large number of test cases. In the vast majority of cases, we come within 5% of estimated optimality.
An Application of Copulas to Accident Precursor Analysis
Authors: Yi Woojune , Bier Vicki M.
Published: November 2008

Data on accident precursors can help in estimating accident frequencies, since they provide a rich source of information on intersystem dependencies. However, Bayesian analysis of accident precursors requires the ability to construct joint prior distributions reflecting such dependencies. For example, the failure probabilities of a particular safety system under normal and accident conditions, respectively, will generally not be identical (because of the effects of the accident), but will almost certainly be correlated (since both failure probabilities reflect the performance of the same components, with the same inherent levels of reliability). In this paper, we explore the use of copulas (a method of representing joint distribution functions with particular marginals) to construct the needed prior distributions, and then use these distributions in a Bayesian analysis of hypothetical precursor data. This demonstrates the usefulness of copulas in practice. The same approach can also be used in a wide variety of other contexts where joint distributions with particular marginals are desired.
A Lagrangian Dual-Based Branch-and-Bound Algorithm for the Generalized Multi-Assignment Problem
Authors: Park June S. , Lim Byung Ha , Lee Youngho
Published: November 2008

This paper develops a Lagrangian dual-based branch-and-bound algorithm for the generalized multi-assignment problem (GMAP) which includes the well-known generalized assignment problem (GAP) as a special case. In GMAP, an object may be required to be duplicated in multiple locations. We develop a Lagrangian dual ascent algorithm for GMAP. This dual ascent and the subgradient search each possess advantages that can be combined to develop a new Lagrangian dual search algorithm. The latter algorithm, when incorporated into a branch-and-bound algorithm as the lower bounding scheme, can accelerate the search process. Computational results demonstrate the efficiency and robustness of this branch-and-bound algorithm not only for GMAPs, but for GAPs that are more difficult than could be solved by previous algorithms.
Variability Reduction Through Operations Reversal
Authors: Lee Hau L. , Tang Christopher S.
Published: November 2008

Products with high product variety are often made in a manufacturing process (or a supply chain) consisting of multiple stages, with products taking certain features or “personalities” at each stage. The product may start as a common single engine. As the product moves along manufacturing process, more features are added, and the product assumes more identities of the final end product. When demands of the end products are variable from period to period, the production volumes of the intermediate stages in the manufacturing process are also variable. It is widely recognized that variabilities of production volumes may add cost to the process. This paper is motivated by our observations in industry, where some companies have reengineered the manufacturing process by reversing two consecutive stages of the process. Such changes could lead to variance reduction, thereby improving the performance of the process. We develop formalized models that characterize the impact of such changes: operations reversal. These models are used to derive insights on when such reversal would be advisable.
Decision Support for Target-Based Resource Allocation of Public Services in Multiunit and Multilevel Systems
Authors: Athanassopoulos Antreas D.
Published: November 2008

This paper is concerned with the problem of resource allocation and target setting in the provision of public services. The paper develops a network-based representation of multilevel resource management with equity, efficiency, and effectiveness being recognised as the fundamental objectives of the system. On the modelling side, the proposed method combines data envelopment analysis and goal programming formulations integrated within an interactive planning framework. An illustrative application on fire departments is used to show the applicability of the method developed to assist the resource allocation process.
The Stochastic Modeling of Purchase Intentions and Behavior
Authors: Young Martin R. , DeSarbo Wayne S. , Morwitz Vicki G.
Published: November 2008

A common objective of social science and business research is the modeling of the relationship between demographic/psychographic characteristics of individuals and the likelihood of certain behaviors for these same individuals. Frequently, data on actual behavior are unavailable; rather, one has available only the self-reported intentions of the individual. If the reported intentions imperfectly predict actual behavior, then any model of behavior based on the intention data should account for the associated measurement error, or else the resulting predictions will be biased. In this paper, we provide a method for analyzing intentions data that explicitly models the discrepancy between reported intention and behavior, thus facilitating a less biased assessment of the impact of designated covariates on actual behavior. The application examined here relates to modeling relationships between demographic characteristics and actual purchase behavior among consumers. A new Bayesian approach employing the Gibbs sampler is developed and compared to alternative models. We show, through simulated and real data, that, relative to methods that implicitly equate intentions and behavior, the proposed method can increase the accuracy with which purchase response models are estimated.
Note. The Role of Returns Policies in Pricing and Inventory Decisions for Catalogue Goods
Authors: Emmons Hamilton , Gilbert Stephen M.
Published: November 2008

Manufacturers often use returns policies to encourage retailers to stock and price items more aggressively. We focus on the effect that such policies have on both a retailer's and a manufacturer's profits when the retailer must commit prior to the selling season to both a stocking quantity and a price at which to sell an item. Such a commitment is often necessary for retailers who sell primarily through catalogues.
Clearance Pricing and Inventory Policies for Retail Chains
Authors: Smith Stephen A. , Achabal Dale D.
Published: November 2008

Clearance pricing and end of season inventory management are challenging and important problems in retailing. Sales rates depend upon price, seasonal effects, and the remaining assortment of items available to customers. There is little time to react to observed sales, and pricing errors result in either loss of potential revenue or excess inventory to be liquidated. This paper develops optimal clearance prices and inventory management policies that take into account the impact of reduced assortment and seasonal changes on sales rates. Versions of these policies have been tested and implemented at three major retail chains and these applications are summarized and discussed.
Admission Policies in Loss Queueing Models with Heterogeneous Arrivals
Authors: Carrizosa E. , Conde E. , Muñoz-Márquez M.
Published: November 2008

In this paper we consider a loss system where the arrivals can be classified into different groups according to their arrival rate and expected service time. While the standard admission policy consists of rejecting only those customers who arrive when all servers are busy, we address the problem of finding the optimal static admission policy (with respect to a given reward structure) when customers can be discriminated according to the group they belong to, thus customers of some groups might be automatically rejected (even if some servers remain idle) in order to enhance the global efficiency of the system. The optimality of a cμ-rule is shown, from which finite-time algorithms for the one- and two-server cases are derived.
Optimal Updating of Forecasts for the Timing of Future Events
Authors: Shumsky Robert A.
Published: November 2008

A major problem in forecasting is estimating the time of some future event. Traditionally, forecasts are designed to minimize an error cost function that is evaluated once, possibly when the event occurs and forecast accuracy can be determined. However, in many applications forecast error costs accumulate over time, and the forecasts themselves may be updated with information that is collected as the expected time of the event approaches. This paper examines one such application, in which flow control managers in the U.S. air traffic system depend on forecasts of aircraft departure times to predict and alleviate potential congestion. These forecasts are periodically updated until take-off occurs, although the number of updates may be limited by the cost of collecting, processing, and distributing information. The procedures developed in this paper balance the costs of accumulated forecast errors and the costs of forecast updates. The procedures are applied to the aircraft departure forecasting problem and are compared with methods currently used by the air traffic management system. Numerical examples demonstrate that the procedures increase forecast accuracy while reducing the costs associated with frequent forecast updates.
Improved Moment-Estimation Formulas Using More Than Three Subjective Fractiles
Authors: Lau Hon-Shiang , Lau Amy Hing-Ling , Ho Chrwan-Jyh
Published: November 2008

PERT-type subjective estimations are used in many stochastic decision models to estimate the random variables' mean and standard deviation (s.d.). The approach is based on the beta-distribution assumption; also, most PERT-type formulas use only three estimated fractiles. We point out that: (i) it is desirable to consider a substantially richer set of distributions than the beta in developing PERT-type formulas; (ii) it may be beneficial to use more than three fractile-estimates in PERT-type formulas. We then develop formulas for estimating the mean and s.d. that are based on a substantially richer set of distributions than the beta and that use more than three estimated fractiles. These formulas perform better than the best currently-available formulas when the subjective distribution is not restricted to be beta.
Network Competition and the Timing of Commercials
Authors: Epstein Gil S.
Published: November 2008

In a market with a small number of networks, the timing of the commercial breaks is a very important factor in determining the number of viewers facing a channel. Using a theoretical model and statistical analysis with empirical data from the four networks in the United States, we analyze the equilibrium achieved in this network monopolistic competition. Among other things, it is shown theoretically and empirically that in equilibrium all networks broadcast commercial breaks at the same time. As the ability to coordinate is not always possible, it is shown that, as the program progresses, the level of coordination decreases.
Exact Solution of the Two-Dimensional Finite Bin Packing Problem
Authors: Martello Silvano , Vigo Daniele
Published: November 2008

Given a set of rectangular pieces to be cut from an unlimited number of standardized stock pieces (bins), the Two-Dimensional Finite Bin Packing Problem is to determine the minimum number of stock pieces that provide all the pieces. The problem is NP-hard in the strong sense and finds many practical applications in the cutting and packing area. We analyze a well-known lower bound and determine its worst-case performance. We propose new lower bounds which are used within a branch-and-bound algorithm for the exact solution of the problem. Extensive computational testing on problem instances from the literature involving up to 120 pieces shows the effectiveness of the proposed approach.
Using Feature Construction to Improve the Performance of Neural Networks
Authors: Piramuthu Selwyn , Ragavan Harish , Shaw Michael J.
Published: November 2008

Recent years have seen the growth in popularity of neural networks for business decision support because of their capabilities for modeling, estimating, and classifying. Compared to other AI methods for problem solving such as expert systems, neural network approaches are especially useful for their ability to learn adaptively from observations. However, neural network learning performed by algorithms such as back-propagation (BP) are known to be slow due to the size of the search space involved and also the iterative manner in which the algorithm works. In this paper, we show that the degree of difficulty in neural network learning is inherent in the given set of training examples. We propose a technique for measuring such learning difficulty, and then develop a feature construction methodology that helps transform the training data so that both the learning speed and classification accuracy of neural network algorithms are improved. We show the efficacy of the proposed method for financial risk classification, a domain characterized by frequent data noise, lack of functional structure, and high attribute interactions. Moreover, the empirical studies also provide insights into the structural characteristics of neural networks with respect to the input data used as well as possible mechanisms to improve the learning performance.
A Note on the Convexity of Service-Level Measures of the (r, q) System
Authors: Zhang Hongtao
Published: November 2008

This note gives a simple proof that in a (r, q) system the average outstanding backorders and the average stockouts per unit time are jointly convex in the two control variables q and r.
Strategic Transfer Pricing
Authors: Alles Michael , Datar Srikant
Published: November 2008

Most research into cost systems has focused on their motivational implications. This paper takes a different approach, by developing a model where two oligopolistic firms strategically select their cost-based transfer prices. Duopoly models frequently assume that firms game on their choice of prices. Product prices, however, are ultimately based on the firms' transfer prices that communicate manufacturing costs to marketing departments. It is for this reason that transfer prices will have a strategic component to them. We derive implications for cost system choice and transfer pricing, including showing that firms may cross subsidize their products—a result consistent with the empirical evidence.
Bridging Behavioral and Economic Theories of Decline: Organizational Inertia, Strategic Competition, and Chronic Failure
Authors: van Witteloostuijn Arjen
Published: November 2008

This paper is another plea for bridging behavioral and economic approaches to the study of competition in markets and strategy making by firms. The arguments focus on a specific case in point: the behavioral theory of organizational decline and the economic modeling of immediate exit. The arguments come in three steps. First, the literature on organizational decline is reviewed by organizing a framework that summarizes arguments from varying economic and organizational perspectives that have, for the most part, developed independently. Observations from empirical and theoretical studies are combined in order to investigate the causes, conditions, courses, and consequences of organizational downturn. Second, a theoretical argument is developed that explains voluntary exit and chronic failure by introducing a proxy of organizational inertia in a model of strategic Cournot duopoly. The key assumptions, which have a behavioral flavour that seemingly contradicts orthodox economics, are grounded in the theoretical and empirical literatures. The results of the model support the claim that “pure profit maximizing behavior may be at the expense of organizational survival” (D'Aveni 1990, p. 135). Third, by formulating two hypotheses and presenting tentative evidence from the chemical industry, the paper hopes to convincingly argue that such integrative models lead to empirical testing of interesting hypotheses. A key finding here is that inefficient firms may outlast their efficient rivals (cf. D'Aveni 1989a).
Personnel Tour Scheduling When Starting-Time Restrictions Are Present
Authors: Brusco Michael J. , Jacobs Larry W.
Published: November 2008

This paper presents an effective solution strategy for an important category of personnel scheduling problems. Specifically, we address the restricted starting-time tour-scheduling problem (RSTP), which involves the determination of the hours of the day (shifts) and days of the week (days on) that employees are assigned to work. RSTP is characterized by restrictions on the number of daily time periods in which employees may begin their shifts. Moreover, the RSTP we consider contains constraints that require separation of starting times. Such restrictions are widely encountered in practice and are based on a number of factors including managerial concerns for control of employee movements, union contractual obligations, and employee preferences for common shift starting times.

A two-stage heuristic solution strategy is proposed for RSTP. We developed eight heuristic procedures based on this strategy and applied them to four sets of labor requirements, for each of 27 United Airlines (UA) airport ground stations. One of the best of these procedures yielded solution costs that averaged only 1.36 full-time-equivalent employees above very conservative LP-based lower bounds. Moreover, the solution costs obtained using this procedure were, on average, 28 percent closer to the lower bounds than solution costs obtained using UA's current scheduling system. We conclude that the two-stage heuristic solution strategy is a valuable platform from which to develop procedures for generating near-optimal solutions to this difficult class of personnel scheduling problems.
Accounting for Endogeneity When Assessing Strategy Performance: Does Entry Mode Choice Affect FDI Survival?
Authors: Shaver J. Myles
Published: November 2008

Firms choose strategies based on their attributes and industry conditions; therefore, strategy choice is endogenous and self-selected. Empirical models that do not account for this and regress performance measures on strategy choice variables are potentially misspecified and their conclusions incorrect. I highlight how self-selection on hard-to-measure or unobservable characteristics can bias strategy performance estimates and recommend an econometric technique that has been developed to account for this effect. Although this concern applies to a wide range of strategy questions, to demonstrate its effect I empirically examine if entry mode choice (acquisition versus greenfield) influences foreign direct investment survival. In specifications that do not account for self-selection, I find that greenfield entries have survival advantages compared to acquisitions. This confirms previous findings. However, the significance of this effect disappears once I account for self-selection of entry mode in the empirical estimates. The results confirm that estimates from models that do not account for self-selection of strategy choice can lead to incorrect or misleading conclusions.
Testing New Direct Marketing Offerings: The Interplay of Management Judgment and Statistical Models
Authors: Morwitz Vicki G. , Schmittlein David C.
Published: November 2008

The launch of a new product or service via direct marketing is nearly always preceded by a test of that offering. Such a “live” test, conducted with a subset of the entire list of customer prospects, can sometimes be useful in a “go/no-go” decision regarding a full-scale launch of the offering. More commonly, the test is used to direct the offering more effectively toward the market segments that appear most promising. Specifically, test results are used and useful to determine whether a particular rental list of customer prospects should indeed be rented, and (for both rental and in-house lists) which specific customer segments should be contacted with the offering.

This paper examines the effectiveness of managers' decisions related to designing a test and interpreting test results both conceptually—based on the literature of heuristics and biases in expert judgments—and empirically, for two new direct marketing offers. The paper describes how an interplay of management judgment and statistical models can lead to increased profits for new direct marketing offerings.
A Minimax Portfolio Selection Rule with Linear Programming Solution
Authors: Young Martin R.
Published: November 2008

A new principle for choosing portfolios based on historical returns data is introduced; the optimal portfolio based on this principle is the solution to a simple linear programming problem. This principle uses minimum return rather than variance as a measure of risk. In particular, the portfolio is chosen that minimizes the maximum loss over all past observation periods, for a given level of return. This objective function avoids the logical problems of a quadratic (nonmonotone) utility function implied by mean-variance portfolio selection rules. The resulting minimax portfolios are diversified; for normal returns data, the portfolios are nearly equivalent to those chosen by a mean-variance rule. Framing the portfolio selection process as a linear optimization problem also makes it feasible to constrain certain decision variables to be integer, or 0-1, valued; this feature facilitates the use of more complex decision-making models, including models with fixed transaction charges and models with Boolean-type constraints on allocations.
On the Equivalence of General and Specific Control in Organizations
Authors: Gersbach Hans
Published: November 2008

Most principal-agent relationships in firms are multidimensional. In the presence of multiple tasks and multiple performance signals, the contract between principal and agent not only has to motivate the agent, but also has to direct the agent to allocate effort among different tasks. The value of efforts for a specific task accrues not only through the principal's expected returns, but also through its contribution to overall risk, and therefore to the risk diversification of the task portfolio. Hence, if the agent is risk-averse, multitask relationships can be considered as a portfolio problem coupled with incentive constraints.

We examine the relationship between specific control (SC) and general control (GC) for multitask principal-agent problems. Under SC, the principal observes the outcome of each individual task and uses this set of information for compensation. Under GC, contracts are based only on the aggregate signal, such as cumulative profits of all tasks. We describe two sets of multitask problems for which GC and SC are equivalent. That is, contracts based only on aggregate performance signals impose the same incentives for the agent as a contract that is based on the outcome of each task. The first multitask problem is characterized by homogeneous tasks. In the second multitask problem, all activities are perfect substitutes in the cost function of the agent. The equivalence of SC and GC arises since GC provides insurance to the agent and yields the same overall risk premium as specific control. Moreover, GC allows the principal to set the same incentives as SC, since the marginal returns from GC are equal to the sum of the marginal returns for each task under SC.

The results described in this paper can serve as benchmarks where GC and SC are equivalent. We show how the equivalence can be relevant for a variety of business situations, such as the compensation of sales persons or managers at all hierarchy levels. We also discuss the reasons when GC and SC differ. Suppose, for instance, that tasks are technologically separable and the precision of the performance of one task is low. Then, the principal is forced under GC to adopt an incentive scheme that implements only a low effort across all tasks since the average precision matters. Under SC, however, the principal can tailor the optimal efforts to each task.
Note. Optimal Balancing of U-Shaped Assembly Lines
Authors: Urban Timothy L.
Published: November 2008

This note presents an integer programming formulation for determining the optimal balance for the U-line line balancing problem. It is shown that this model can optimally solve larger problems than previously reported.
Managing Experimentation in the Design of New Products
Authors: Thomke Stefan H.
Published: November 2008

Experimentation, a form of problem-solving, is a fundamental innovation activity and accounts for a significant part of total innovation cost and time. In many fields, the economics of experimentation are being radically affected by the use of new and greatly improved versions of methods such as computer simulation, mass screening, and rapid prototyping. This paper shows that a given experiment (and the related trial and error learning) can be conducted in different “modes” (e.g., computer simulation and rapid prototyping) and that users will find it economical to optimize the switching between these modes as to reduce total product development cost and time. The findings are confirmed by a large-scale empirical study of the experimentation process in the design of integrated circuits containing either (1) electrically programmable logic devices (EPLDs); or (2) application-specific integrated circuits (ASICs). In comparing their different experimentation strategies for analogous design projects, I found that the former (EPLD)—an approach that utilizes many prototype iterations—outperformed the latter (ASIC) by factor of 2.2 (in person-months) and over 43 percent of that difference can be attributed to differences in experimentation strategies. The implications for managerial practice and theory are discussed and suggestions for further research undertakings are provided.
The Missing Link in Budget Models of Nonprofit Institutions: Two Practical Dutch Applications
Authors: Verheyen Piet
Published: November 2008

The Dutch government, health insurance associations, and research boards allocate budgets to nonprofit institutions (hospitals, universities), based on general indicators (inhabitants, admissions, or students). With these budgets, the top management of each institution (the principal) allocates the funds, using general indicators to distribute the money further down to the base. At the base of the nonprofit institutions, the professionals (the agents) perform a spectrum of specific tasks. Tension around the budgetting process exists between top management and professionals. This paper resolves the tension along the research lines of Burton and Obel (1995) by measuring in money terms the specific tasks of the professionals of universities and hospitals at the base, and by reconsidering the theoretical background of the internal budget system. The study also develops the missing link in an integral external and internal budget system by integrating the managerial and professional decisions or the input-output decisions in one approach.
Active Nonlinear Tests (ANTs) of Complex Simulation Models
Authors: Miller John H.
Published: November 2008

Simulation models are becoming increasingly common in the analysis of critical scientific, policy, and management issues. Such models provide a way to analyze complex systems characterized by both large parameter spaces and nonlinear interactions. Unfortunately, these same characteristics make understanding such models using traditional testing techniques extremely difficult. Here we show how a model's structure and robustness can be validated via a simple, automatic, nonlinear search algorithm designed to actively “break” the model's implications. Using the active nonlinear tests (ANTs) developed here, one can easily probe for key weaknesses in a simulation's structure, and thereby begin to improve and refine its design. We demonstrate ANTs by testing a well-known model of global dynamics (World3), and show how this technique can be used to uncover small, but powerful, nonlinear effects that may highlight vulnerabilities in the original model.
An Algorithm for Single-Item Capacitated Economic Lot Sizing with Piecewise Linear Production Costs and General Holding Costs
Authors: Shaw Dong X. , Wagelmans Albert P. M.
Published: November 2008

We consider the Capacitated Economic Lot Size Problem with piecewise linear production costs and general holding costs, which is an NP-hard problem but solvable in pseudo-polynomial time. A straightforward dynamic programming approach to this problem results in an O(n 2 c̄d̄) algorithm, where n is the number of periods, and d̄ and c̄ are the average demand and the average production capacity over the n periods, respectively. However, we present a dynamic programming procedure with complexity O(n 2 q̄d̄), where q̄ is the average number of pieces required to represent the production cost functions. In particular, this means that problems in which the production functions consist of a fixed set-up cost plus a linear variable cost are solved in O(n 2 d̄) time. Hence, the running time of our algorithm is only linearly dependent on the magnitude of the data. This result also holds if extensions such as backlogging and startup costs are considered. Moreover, computational experiments indicate that the algorithm is capable of solving quite large problem instances within a reasonable amount of time. For example, the average time needed to solve test instances with 96 periods, 8 pieces in every production cost function, and average demand of 100 units is approximately 40 seconds on a SUN SPARC 5 workstation.
The Zero-Condition: A Simplifying Assumption in QALY Measurement and Multiattribute Utility
Authors: Miyamoto John M. , Wakker Peter P. , Bleichrodt Han , Peters Hans J. M.
Published: November 2008

This paper studies the implications of the “zero-condition” for multiattribute utility theory. The zero-condition simplifies the measurement and derivation of the Quality Adjusted Life Year (QALY) measure commonly used in medical decision analysis. For general multiattribute utility theory, no simple condition has heretofore been found to characterize multiplicatively decomposable forms. When the zero-condition is satisfied, however, such a simple condition, “standard gamble invariance,” becomes available.
Externalities, Tangible Externalities, and Queue Disciplines
Authors: Haviv Moshe , Ritov Ya'acov
Published: November 2008

Externalities are the (marginal) costs that a user of a common resource imposes on others. We introduce the efficient measure of tangible externalities that are the costs that a user imposes on others while being served. Then, for a single server queueing system under various service disciplines, we compute the expected externalities and the expected tangible externalities conditioning on the length of the service requirement.
Lot Sizing in General Assembly Systems with Setup Costs, Setup Times, and Multiple Constrained Resources
Authors: Katok Elena , Lewis Holly S. , Harrison Terry P.
Published: November 2008

We introduce a heuristic method for finding good, feasible solutions for multiproduct lot sizing problems with general assembly structures, multiple constrained resources, and nonzero setup costs and setup times. We evaluate the performance of this heuristic by comparing its solutions to optimal solutions of small randomly generated problems and to time-truncated Optimization Subroutine Library (OSL) solutions of medium-sized randomly generated problems. In the first case, the heuristic locates solutions averaging 4 percent worse than optimal in less than 1 percent of time required by OSL. The heuristic solutions to medium-sized problems are approximately 26 percent better than solutions OSL finds after 10,000 CPU seconds, and the heuristic finds these solutions in approximately 10 percent of OSL time.
Distribution Channels: An Extension of Exclusive Retailership
Authors: Trivedi Minakshi
Published: November 2008

The underlying channel structure in most studies to date has consisted either of exclusive dealers that sell only one manufacturer's brand or of a single retailer selling multiple brands. Little attention has been given to the larger segment of most consumer goods markets in which retailers compete to sell multiple brands at the same location. This research seeks to add to the growing literature of channel competition by analyzing three channel structures, the least constrained of which deals with two competing manufacturers and two retailers, each of whom distributes both products in a noncooperative game with two Nash's and one Stackleberg equilibrium. Using differentiated products and a linear demand function, we introduce the concept of “store substitutability”—a measure corresponding to product substitutability representing competitiveness at the retail level—between the two retailers. We are able to obtain closed form solutions for all cases. We show that the presence of competitive effects at both retail and manufacturer levels of distribution has a significant impact on profits and prices. We also study the effects of various power relationships in the channel. Furthermore, we compare these results to those obtained by previous research. Finally, we propose some testable implications and suggest avenues for future research.
Optimal Production and Inventory Policy for Multiple Products Under Resource Constraints
Authors: DeCroix Gregory A. , Arreola-Risa Antonio
Published: November 2008

We show that a modified base-stock policy is optimal for multiproduct, infinite-horizon production-inventory systems, where demand for the products is random and the products share a finite resource every period. We characterize the optimal policy for the case of homogeneous products. Because of the difficulty in computing the optimal base-stock levels for the heterogeneous case, we propose a heuristic that is simple enough for practical applications. We present numerical results that suggest that the heuristic yields near-optimal solutions.
Communication and Uncertainty in Concurrent Engineering
Authors: Loch Christoph H. , Terwiesch Christian
Published: November 2008

We present an analytical model of concurrent engineering, where an upstream and a down-stream task are overlapped to minimize time-to-market. The gain from overlapping activities must be weighed against the delay from rework that results from proceeding in parallel based on preliminary information. Communication reduces the negative effect of rework at the expense of communication time. We derive the optimal levels of concurrency combined with communication, and we analyze how these two decisions interact in the presence of uncertainty and dependence. Uncertainty is modeled via the average rate of engineering changes, and its reduction via the change of the modification rate over time. In addition, we model dependence by the impact the modifications impose on the downstream task. The model yields three main results. First, we present a dynamic decision rule for determining the optimal meeting schedule. The optimal meeting frequency follows the frequency of engineering changes over time, and it increases with the levels of uncertainty and dependence. Second, we derive the optimal concurrency between activities when communication follows the optimal pattern described by our decision rule. Uncertainty and dependence make concurrency less attractive, reducing the optimal overlap. However, the speed of uncertainty reduction may increase or decrease optimal overlap. Third, choosing communication and concurrency separately prevents achieving the optimal time-to-market, resulting in a need for coordination.