bluuebunny/crossref_metadata_2025 huggingface dataset:
Strong One-Switch Utility
Authors: Bell David E. , Fishburn Peter C.
Published: December 2003

The linear plus exponential utility function has received increasing attention of late as a particularly attractive family for evaluating additive gambles for wealth. In addition to its ability to reflect increasing appreciation for money, risk aversion, and decreasing risk aversion, it is consistent with a risk-return representation in which return is measured by expected value. In this paper we present a new condition, strong one-switch, that characterizes the linear plus exponential family.
Demand Heterogeneity and Technology Evolution: Implications for Product and Process Innovation
Authors: Adner Ron , Levinthal Daniel
Published: December 2003

The evolution of technology has been a central issue in the strategy and organizations literature. However, the focus of much of this work has been on what is essentially the “supply side” of technical change—the evolution of firm capabilities. We present a demand-based view of technology evolution that is focused on the interaction between technology development and the demand environment in which the technology is ultimately evaluated. We develop a formal computer simulation model that explicitly considers the influence of heterogeneity in market demand—the presence of consumers with different needs and requirements—on firms' innovation choices. The model is used to examine the dynamics of product and process innovation (Utterback and Abernathy 1975). The analysis reveals that demand heterogeneity offers an alternative to supply-side explanations of the technology life cycle. Further, by considering the implications of decreasing marginal utility from performance improvements, the model highlights the role of “technologically satisfied” consumers in shaping innovation incentives, and suggests a rationale for a new stage in the technology life cycle characterized by increasing performance at a stable price. The stage has not yet been treated formally in the literature, but is widely observed, most prominently in digital and information-based technologies.
Ending Inventory Valuation in Multiperiod Production Scheduling
Authors: Fisher Marshall , Ramdas Kamalini , Zheng Yu-Sheng
Published: December 2003

When making lot-sizing decisions, managers often use a model horizon T that is much smaller than any reasonable estimate of the firm's future horizon. This is done because forecast accuracy deteriorates rapidly for longer horizons, while computational burden increases. However, what is optimal over the short horizon may be suboptimal over the long run, resulting in errors known as end-effects. A common end-effect in lot-sizing models is to set end-of-horizon inventory to zero. This policy can result in excessive setup costs or stock-outs in the long run.

We present a method to mitigate end-effects in lot sizing by including a valuation term V(IT) for end-of-horizon inventory IT, in the objective function of the short-horizon model. We develop this concept within the classical EOQ modeling framework, and then apply it to the dynamic lot-sizing problem (DLSP). If demand in each period of the DLSP equals the long-run average demand rate, then our procedure induces an optimal ordering policy over the short horizon that coincides with the long-run optimal ordering policy. We test our procedure empirically against the Wagner-Whitin algorithm and the Silver Meal heuristic, under several demand patterns, within a rolling horizon framework. With few exceptions, our approach significantly outperforms the other approaches tested, for modest to long model horizons. We discuss applicability to more general lot-sizing problems.
Prospect Theory, Mental Accounting, and Differences in Aggregated and Segregated Evaluation of Lottery Portfolios
Authors: Langer Thomas , Weber Martin
Published: December 2003

If individuals have to evaluate a sequence of lotteries, their judgment is influenced by the presentation mode. Experimental studies have found significantly higher acceptance rates for a sequence of lotteries if the overall distribution was displayed instead of the set of lotteries itself. Mental accounting and loss aversion provide an easy and intuitive explanation for this phenomenon. In this paper we offer an explanation that incorporates further evaluation concepts of Prospect Theory. Our formal analysis of the difference in aggregated and segregated portfolio evaluation demonstrates that the higher attractiveness of the aggregated presentation mode is not a general phenomenon (as suggested in the literature) but depends on specific parameters of the lotteries. The theoretical findings are supported by an experimental study. In contrast to the existing evidence and in line with our theoretical results, we find for specific types of lotteries an even lower acceptance rate if the overall distribution is displayed.
Organizational Differences in Rates of Learning: Evidence from the Adoption of Minimally Invasive Cardiac Surgery
Authors: Pisano Gary P. , Bohmer Richard M.J. , Edmondson Amy C.
Published: December 2003

This paper examines learning curves in the health care setting to determine whether organizations achieve performance improvements from cumulative experience at different rates. Although extensive research has shown that cumulative experience leads to performance improvement across numerous contexts, the question of how much of this improvement is due to mere experience and how much is due to collective learning processes has received little attention. We argue that organizational learning processes may allow some organizations to benefit more than others from equivalent levels of experience. We thus propose that learning curves can vary across organizations engaged in the same “learning task,” due to organizational learning effects. To investigate this proposition, we investigate cardiac surgery departments implementing a new technology for minimally invasive cardiac surgery. Data on operative procedure times from a sample of 660 patients who underwent the new operation at 16 different institutions are analyzed. The results confirm that cumulative experience is a significant predictor of learning, and further reveal that the slope of the learning curve varies significantly across organizations. Theoretical and practical implications of the work are discussed.
A Polyhedral Approach to Simplified Crew Scheduling and Vehicle Scheduling Problems
Authors: Fischetti Matteo , Lodi Andrea , Martello Silvano , Toth Paolo
Published: December 2003

Crew and vehicle scheduling are fundamental issues in public transit management. Informally, they can be described as the problem of determining the optimal duties for a set of crews (e.g., bus drivers) or vehicles (e.g., buses) so as to cover a given set of timetabled trips, satisfying a number of constraints laid down by the union contract and company regulations. We consider the simplified but still NP-hard case in which several depots are specified, and limits on both the total time between the start and the end of any duty (spread time) and the total duty operational time (working time) are imposed. We give a 0-1 linear programming formulation based on binary variables associated with trip transitions, which applies to both crew and vehicle scheduling. The model is enhanced by means of new families of valid inequalities, for which exact and heuristic separation procedures are proposed. These techniques are embedded into an exact branch-and-cut algorithm, which also incorporates heuristic procedures. The performance of two implementations of the method (for vehicle scheduling and crew scheduling, respectively) are evaluated through computational testing on both random and real-world test problems from the literature.
A Tabu-Search Heuristic for the Capacitated Lot-Sizing Problem with Set-up Carryover
Authors: Gopalakrishnan Mohan , Ding Ke , Bourjolly Jean-Marie , Mohan Srimathy
Published: December 2003

This paper presents a tabu-search heuristic for the capacitated lot-sizing problem (CLSP) with set-up carryover. This production-planning problems allows multiple items to be produced within a time period, and setups for items to be carried over from one period to the next. Two interrelated decisions, sequencing and lot sizing, are present in this problem. Our tabu-search heuristic consists of five basic move types—three for the sequencing decisions and two for the lot-sizing decisions. We allow infeasible solutions to be generated at a penalty during the course of the search. We use several search strategies, such as dynamic tabu list, adaptive memory, and self-adjusting penalties, to strengthen our heuristic. We also propose a lower-bounding procedure to estimate the quality of our heuristic solution. We have also modified our heuristic to produce good solutions for the CLSP without set-up carryover. The computational study, conducted on a set of 540 test problems, indicates that on average our heuristic solutions are within 12% of a bound on optimality. In addition, for the set of test problems our results indicate an 8% reduction in total cost through set-up carryover.
Solving the Cell Suppression Problem on Tabular Data with Linear Constraints
Authors: Fischetti Matteo , Salazar Juan José
Published: December 2003

Cell suppression is a widely used technique for protecting sensitive information in statistical data presented in tabular form. Previous works on the subject mainly concentrate on 2- and 3-dimensional tables whose entries are subject to marginal totals. In this paper we address the problem of protecting sensitive data in a statistical table whose entries are linked by a generic system of linear constraints. This very general setting covers, among others, k-dimensional tables with marginals as well as the so-called hierarchical and linked tables that are very often used nowadays for disseminating statistical data. In particular, we address the optimization problem known in the literature as the (secondary) Cell Suppression Problem, in which the information loss due to suppression has to be minimized. We introduce a new integer linear programming model and outline an enumerative algorithm for its exact solution. The algorithm can also be used as a heuristic procedure to find near-optimal solutions. Extensive computational results on a test-bed of 1,160 real-world and randomly generated instances are presented, showing the effectiveness of the approach. In particular, we were able to solve to proven optimality 4-dimensional tables with marginals as well as linked tables of reasonable size (to our knowledge, tables of this kind were never solved optimally by previous authors).
Cutting Corners and Working Overtime: Quality Erosion in the Service Industry
Authors: Oliva Rogelio , Sterman John D.
Published: December 2003

The erosion of service quality throughout the economy is a frequent concern in the popular press. The American Customer Satisfaction Index for services fell in 2000 to 69.4%, down 5 percentage points from 1994. We hypothesize that the characteristics of services—inseparability, intangibility, and labor intensity—interact with management practices to bias service providers toward reducing the level of service they deliver, often locking entire industries into a vicious cycle of eroding service standards. To explore this proposition we develop a formal model that integrates the structural elements of service delivery. We use econometric estimation, interviews, observations, and archival data to calibrate the model for a consumer-lending service center in a major bank in the United Kingdom. We find that temporary imbalances between service capacity and demand interact with decision rules for effort allocation, capacity management, overtime, and quality aspirations to yield permanent erosion of the service standards and loss of revenue. We explore policies to improve performance and implications for organizational design in the service sector.
Optimal Pricing That Coordinates Queues with Customer-Chosen Service Requirements
Authors: Ha Albert Y.
Published: December 2003

This article considers the problem of coordinating the admission rates and service requirements of a multiclass queue when these decisions are made on a decentralized basis. The customer classes are characterized by different demand patterns, delay costs, and service costs. Customers make individual decisions on whether to join the queue and, if so, their service requirements. Their class identities and service requirements are private information not known to the system manager. We develop a two-stage decision framework to analyze the problem and characterize the optimal admission rates and service requirements under both centralized and decentralized assumptions. We distinguish admission and service externality costs that lead to suboptimal performance under decentralized control. For a given service discipline, we derive optimal class-specific pricing schemes that can coordinate the system when only service requirements but not class identities are unobservable. When customer class identities are also unobservable, we consider two common service disciplines that offer undifferentiated service: processor sharing and first-come-first-served. Based on the general framework, for the M/G/s processor sharing queue, we show that a single variable fee (payment per unit of time in the system) can induce the optimal admission rates and service requirements for all customer classes. For the M/G/1 first-come-first-served queue, we show that a single pricing scheme that is quadratic in time in service can induce the optimal admission rates and service requirements for all customer classes. Our result demonstrates that, under suitable conditions, simple and undifferentiated pricing can coordinate complex queueing systems with heterogeneous customer classes.
Pricing and Hedging Path-Dependent Options Under the CEV Process
Authors: Davydov Dmitry , Linetsky Vadim
Published: December 2003

Much of the work on path-dependent options assumes that the underlying asset price follows geometric Brownian motion with constant volatility. This paper uses a more general assumption for the asset price process that provides a better fit to the empirical observations. We use the so-called constant elasticity of variance (CEV) diffusion model where the volatility is a function of the underlying asset price. We derive analytical formulae for the prices of important types of path-dependent options under this assumption. We demonstrate that the prices of options, which depend on extrema, such as barrier and lookback options, can be much more sensitive to the specification of the underlying price process than standard call and put options and show that a financial institution that uses the standard geometric Brownian motion assumption is exposed to significant pricing and hedging errors when dealing in path-dependent options.
Modelling Practical Lot-Sizing Problems as Mixed-Integer Programs
Authors: Belvaux Gaetan , Wolsey Laurence A.
Published: December 2003

In spite of the remarkable improvements in the quality of general purpose mixed-integer programming software, the effective solution of a variety of lot-sizing problems depends crucially on the development of tight formulations for the special problem features occurring in practice.

After reviewing some of the basic preprocessing techniques for handling safety stocks and multilevel problems, we discuss a variety of aspects arising particularly in small and large bucket (time period) models such as start-ups, changeovers, minimum batch sizes, choice of one or two set-ups per period, etc. A set of applications is described that contains one or more of these special features, and some indicative computational results are presented. Finally, to show another technique that is useful, a slightly different (supply chain) application is presented, for which the a priori addition of some simple mixed-integer inequalities, based on aggregation, leads to important improvements in the results.
The Effect of Incentive Schemes and Organizational Arrangements on the New Product Development Process
Authors: Natter Martin , Mild Andreas , Feurstein Markus , Dorffner Georg , Taudes Alfred
Published: December 2003

This paper proposes a new model for studying the new product development process in an artificial environment. We show how connectionist models can be used to simulate the adaptive nature of agents' learning exhibiting similar behavior as practically experienced learning curves. We study the impact of incentive schemes (local, hybrid, and global) on the new product development process for different types of organizations. Sequential organizational structures are compared to two different types of team-based organizations, incorporating methods of quality function deployment such as the house of quality. A key finding of this analysis is that the firms' organizational structure and agents' incentive system significantly interact. We show that the house of quality is less affected by the incentive scheme than firms using a trial and error approach. This becomes an important factor for new product success when the agents' performance measures are conflicting.
Capacity Acquisition, Subcontracting, and Lot Sizing
Authors: Atamtürk Alper , Hochbaum Dorit S.
Published: December 2003

The fundamental question encountered in acquiring capacity to meet nonstationary demand over a multiperiod horizon is how to balance the trade-off between having insufficient capacity in some periods and excess capacity in others. In the former situation, part of the demand is subcontracted while, in the latter, capacity that has been paid for is rendered idle. Capacity and subcontracting decisions arise in many economic activities ranging from production capacity planning in semiconductor fabs to leasing communication networks, from transportation contracts to staffing of call centers. In this paper, we investigate the trade-offs between acquiring capacity, subcontracting, production, and holding inventory to satisfy nonstationary demand over a finite horizon. We present capacity acquisition models with holding and without holding inventory and identify forecast-robust properties of the models that restrict the dependence of optimal capacity decisions on the demand forecasts. We develop algorithms for numerous practical cost structures involving variable and fixed charges and prove that they all have polynomial time complexity. For models with inventory, we solve a sequence of constant capacity lot-sizing and subcontracting subproblems, which is also of independent interest.
New Procedures to Select the Best Simulated System Using Common Random Numbers
Authors: Chick Stephen E. , Inoue Koichiro
Published: December 2003

Although simulation is widely used to select the best of several alternative system designs, and common random numbers is an important tool for reducing the computation effort of simulation experiments, there are surprisingly few tools available to help a simulation practitioner select the best system when common random numbers are employed. This paper presents new two-stage procedures that use common random numbers to help identify the best simulated system. The procedures allow for screening and attempt to allocate additional replications to improve the value of information obtained during the second stage, rather than determining the number of replications required to provide a given probability of correct selection guarantee. The procedures allow decision makers to reduce either the expected opportunity cost associated with potentially selecting an inferior system, or the probability of incorrect selection. A small empirical study indicates that the new procedures outperform several procedures with respect to several criteria, and identifies potential areas for further improvement.
Regression, Correlation, and the Time Interval: Additive-Multiplicative Framework
Authors: Levy Haim , Guttman Ilan , Tkatch Isabel
Published: December 2003

When two random variables are both additive or multiplicative, the effect of the way one “slices” the available period to subperiods (time intervals) is well documented in the literature. In this paper, we investigate the time interval effect when one of the variables is additive and one is multiplicative. We prove that the squared multiperiod correlation coefficient (ρ2n) decreases monotonically as n increases, and approaches zero when n goes to infinity. However, for relevant data corresponding to the U.S. stock market index, when shifting from weekly parameters to quarterly parameters the decrease in ρ2n is negligible. The effect on the regression coefficient is much more dramatic and even a shift from weekly data to quarterly data affects the regression coefficient substantially. The regression slope generally approaches zero, minus infinity or plus infinity, as the number of periods increases. Montonicity, however, exists only in certain cases.
Hybridising Tabu Search with Optimisation Techniques for Irregular Stock Cutting
Authors: Bennell Julia A. , Dowsland Kathryn A.
Published: December 2003

Sequential meta-heuristic implementations for the irregular stock-cutting problem have highlighted a number of common problems. The literature suggests a consensus that it is more efficient to allow configurations with overlapping pieces in the solution space and to penalise these in the evaluation function. However, depending on the severity of the penalty this relaxation results in a tendency to converge toward infeasible solutions or to seek out feasible solutions at the expense of overall quality. A further problem is encountered in defining a neighbourhood search strategy that can deal with the infinite solution space inherent in the irregular stock-cutting problem. The implementation in this paper adopts a hybrid tabu search approach that incorporates two very different optimisation routines that utilise alternative neighbourhoods to address the described problems.
Warranty Signalling and Reputation
Authors: Balachander Subramanian
Published: December 2003

In this paper, we present a signalling-based explanation for the empirical phenomenon that a longer warranty may be offered by a product with lower quality. Our explanation hinges on differences in consumer knowledge about reliability of established and newer products. In a product market where a new entrant competes with an established product, we show that signalling behavior leads to an outcome where the less reliable product may carry the longer warranty.
An Optimization Model for the Simultaneous Operational Flight and Pilot Scheduling Problem
Authors: Stojković Mirela , Soumis François
Published: December 2003

This paper describes and solves the operational pilot scheduling problem for one day of operations. The problem consists in simultaneously modifying, as necessary, the existing flight departure schedules and planned individual work days (duties) while keeping planned aircraft itineraries unchanged. It requires the covering of all flights from one day of operations with available pilots while minimizing changes in both the flight schedule and the next day's planned duties. The newly constructed personalized duties must not exceed the maximum duty duration. Flight precedence constraints, coming from existing fixed aircraft itineraries, must be respected as well. The problem is mathematically formulated as an integer nonlinear multicommodity network flow model with time windows and additional constraints. To solve the problem, a Dantzig-Wolfe decomposition combined with a branch-and-bound method has been used. The master problem comprises the flight-covering constraints and a new set of flight precedence constraints. Subproblems consisting of time-constrained shortest-path problems with linear time costs are solved by a specialized dynamic-programming algorithm. The proposed optimization approach has been tested on several input data sets. All of them have been successfully solved in very short computational time.
Organizational Endowments and the Performance of University Start-ups
Authors: Shane Scott , Stuart Toby
Published: December 2003

The question of how initial resource endowments-the stocks of resources that entrepreneurs contribute to their new ventures at the time of founding-affect organizational life chances is one of significant interest in organizational ecology, evolutionary theory, and entrepreneurship research. Using data on the life histories of all 134 firms founded to exploit MIT-assigned inventions during the 1980-1996 period, the study analyzes how resource endowments affect the likelihood of three critical outcomes: that new ventures attract venture capital financing, experience initial public offerings, and fail. Our analysis focuses on the role of founders' social capital as a determinant of these outcomes. Event history analyses show that new ventures with founders having direct and indirect relationships with venture investors are most likely to receive venture funding and are less likely to fail. In turn, receiving venture funding is the single most important determinant of the likelihood of IPO. We conclude that the social capital of company founders represents an important endowment for early-stage organizations.
A Comparison of U.S. and European University-Industry Relations in the Life Sciences
Authors: Owen-Smith Jason , Riccaboni Massimo , Pammolli Fabio , Powell Walter W.
Published: December 2003

We draw on diverse data sets to compare the institutional organization of upstream life science research across the United States and Europe. Understanding cross-national differences in the organization of innovative labor in the life sciences requires attention to the structure and evolution of biomedical networks involving public research organizations (universities, government laboratories, nonprofit research institutes, and research hospitals), science-based biotechnology firms, and multinational pharmaceutical corporations. We use network visualization methods and correspondence analyses to demonstrate that innovative research in biomedicine has its origins in regional clusters in the United States and in European nations. But the scientific and organizational composition of these regions varies in consequential ways. In the United States, public research organizations and small firms conduct R&D across multiple therapeutic areas and stages of the development process. Ties within and across these regions link small firms and diverse public institutions, contributing to the development of a robust national network. In contrast, the European story is one of regional specialization with a less diverse group of public research organizations working in a smaller number of therapeutic areas. European institutes develop local connections to small firms working on similar scientific problems, while cross-national linkages of European regional clusters typically involve large pharmaceutical corporations. We show that the roles of large and small firms differ in the United States and Europe, arguing that the greater heterogeneity of the U.S. system is based on much closer integration of basic science and clinical development.
Optimal Control of a Paired-Kidney Exchange Program
Authors: Zenios Stefanos A.
Published: December 2003

Organ exchanges are expected to increase the utilization of living donors and to alleviate the critical shortage of organs for transplantation. The typical arrangement involves a direct exchange between two blood-type incompatible donor-candidate pairs. An alternate possibility is an indirect exchange between one such pair and the highest priority candidate on the regular waiting list for cadaveric organs. This paper focuses on the mix of direct and indirect exchanges that maximizes the expected total discounted quality-adjusted life years (QALY) of the candidates in the participating pairs. Direct exchanges are preferable because the candidate receives a living-donor organ instead of the inferior cadaveric organ an indirect exchange provides. However, the latter involves a shorter wait. To capture this tradeoff, we develop a double-ended queueing model for an exchange system with two types of donorcandidate pairs, and obtain an optimal dynamic exchange policy by invoking a Brownian approximation. The policy takes the form of a two-sided regulator in which new pairs will join the exchange system to wait for a direct exchange if and only if the process modeling the exchange system is within the regulator's two barriers. In all other circumstances, new pairs will participate in an indirect exchange. Expressions for the optimal barriers are obtained under a variety of assumptions about the objective function, including one of complete candidate autonomy. The analysis identifies three design principles that will amplify the likelihood of an exchange program's success. First, exchange programs must involve the coordinated activities of multiple local transplant centers to enjoy the substantial benefits of resource pooling. Second, participant wait must be controlled through indirect exchanges. Third, the program must respect participants' autonomy and weigh that autonomy against the broader goal of maximizing their overall welfare.
Structuring the New Product Development Pipeline
Authors: Ding Ming , Eliashberg Jehoshua
Published: December 2003

In many new product development (NPD) situations, the development process is characterized by uncertainty, and no single development approach will necessarily lead to a successful product. To increase the likelihood of having at least one successful product, multiple approaches may be simultaneously funded at the various NPD stages. The managerial challenge is to construct ex ante an appropriate NPD pipeline by choosing the right number of approaches to be funded at each stage. This so-called pipeline problem is also present in, among others, advertising copy selection and new products test markets problems. We describe here a normative model for structuring pipelines for such situations. The optimal structure of the pipeline is driven by the cost of the development approach, its probability of survival, and the expected profitability. We illustrate the workability and implications of the model by applying it to some real-world scenarios in the pharmaceutical industry, and by comparing its normative pipeline recommendations against actual pipelines. Our results suggest that, for the cases we studied, firms tend to use narrower pipelines for their new drug development than they should, and thereby they underspend on research and development. We also present general qualitative insights for one- and two-stage NPD optimal pipeline structures.
A Multi-Echelon Inventory System with Information Exchange
Authors: Moinzadeh Kamran
Published: December 2003

In this paper, we consider a supply-chain model consisting of a single product, one supplier, and multiple retailers. Demand at the retailers is random, but stationary. Each retailer places her orders to the supplier according to the well-known (Q,R) policy. We assume that the supplier has online information about the demand, as well as inventory activities of the product at each retailer, and uses this information when making order/replenishment decisions. We first propose a replenishment policy for the supplier, which incorporates information about the inventory position of the retailers. Then, we provide an exact analysis of the operating measures of such systems. Assuming the inventory/replenishment decisions are made centrally for the system, we compare the performance of our model with those that do not use information in their decision making, namely, systems that use installation stock policies via a numerical experiment. Based on our numerical results, we identify the parameter settings under which information sharing is most beneficial.
Adaptive Inventory Control for Nonstationary Demand and Partial Information
Authors: Treharne James T. , Sox Charles R.
Published: December 2003

This paper examines several different policies for an inventory control problem in which the demand process is nonstationary and partially observed. The probability distribution for the demand in each period is determined by the state of a Markov chain, the core process. However, the state of this core process is not directly observed, only the actual demand is observed by the decision maker. Given this demand process, the inventory control problem is a composite-state, partially observed Markov decision process (POMDP), which is an appropriate model for a number of dynamic demand problems. In practice, managers often use certainty equivalent control (CEC) policies to solve such a problem. However, this paper presents results that demonstrate that there are other practical control policies that almost always provide much better solutions for this problem than the CEC policies commonly used in practice. The computational results also indicate how specific problem characteristics influence the performance of each of the alternative policies.
A Dynamic Programming Procedure for Pricing American-Style Asian Options
Authors: Ben-Ameur Hatem , Breton Michèle , L'Ecuyer Pierre
Published: December 2003

Pricing European-style Asian options based on the arithmetic average, under the Black and Scholes model, involves estimating an integral (a mathematical expectation) for which no easily computable analytical solution is available. Pricing their American-style counterparts, which provide early exercise opportunities, poses the additional difficulty of solving a dynamic optimization problem to determine the optimal exercise strategy. A procedure for pricing American-style Asian options of the Bermudan flavor, based on dynamic programming combined with finite-element piecewise-polynomial approximation of the value function, is developed here. A convergence proof is provided. Numerical experiments illustrate the consistency and efficiency of the PROCEDURE. Theoretical properties of the value function and of the optimal exercise strategy are also established.
Privacy Protection of Binary Confidential Data Against Deterministic, Stochastic, and Insider Threat
Authors: Garfinkel Robert , Gopal Ram , Goes Paulo
Published: December 2003

A practical model and an associated method are developed for providing consistent, deterministically correct responses to ad-hoc queries to a database containing a field of binary confidential data. COUNT queries, i.e., the number of selected subjects whose confidential datum is positive, are to be answered. Exact answers may allow users to determine an individual's confidential information. Instead, the proposed technique gives responses in the form of a number plus a guarantee so that the user can determine an interval that is sure to contain the exact answer. At the same time, the method is also able to provide both deterministic and stochastic protection of the confidential data to the subjects of the database. Insider threat is defined precisely and a simple option for defense against it is given. Computational results on a simulated database are very encouraging in that most queries are answered with tight intervals, and that the quality of the responses improves with the number of subjects identified by the query. Thus the results are very appropriate for the very large databases prevalent in business and governmental organizations. The technique is very efficient in terms of both time and storage requirements, and is readily scalable and implementable.
CEO Characteristics and Firm R&D Spending
Authors: Barker Vincent L. , Mueller George C.
Published: December 2003

Over the past fifteen years, a number of studies have examined the determinants of firm R&D spending. These studies, however, almost invariably focus on the role of firm or external ownership characteristics in predicting R&D spending while overlooking the attributes of the top managers involved in allocating corporate resources. In this study, we change that focus by empirically examining how R&D spending as compared to industry competitors varies at firms based on the characteristics of their CEOs. Using a sample of publicly traded firms, we find that CEO characteristics explain a significant proportion of the sample variance in firm R&D spending even when corporate strategy, ownership structure, and other firm-level attributes are controlled. In terms of individual CEO characteristics, we find that R&D spending is greater at firms where CEOs are younger, have greater wealth invested in firm stock and signifacant career experience in marketing and/or engineering/R&D. In contrast to existing theory, we find that the amount of a CEO's formal education had no significant association with R&D spending once a CEO has attained a college degree. However, significant R&D spending increases are found at firms where CEOs have advanced science-related degrees. From subgroup analyses, we further find that CEO effects on relative R&D spending increase with longer CEO tenure implying that CEOs, over time, may mold R&D spending to suit their own preferences. From these results, we make implications for both research on determinants of R&D spending and managerial practice.
Timber Harvesting as a Part of the Portfolio Management: A Multiperiod Stochastic Optimisation Approach
Authors: Heikkinen Veli-Pekka
Published: December 2003

A multiperiod stochastic optimization model is formulated for a land owner who can speculate between investing harvesting income in financial assets and postponing harvesting. This paper demonstrates the benefits from using a multiperiod model, the effects of cointegration on optimal portfolio, and the differences between the timber harvesting model and the standard financial portfolio optimisation model. The demonstrations are made partly by using a real Finnish forest and price data, and partly by using artificial data. In the real data example, the system is demonstrated using a case where it is assumed that the land owner has several mature forest stands, which can be harvested at any time during the next 3 years. Investment alternatives are stocks, government bonds, and bank deposits. The forestry returns were defined as a sum of exponential physical growth and stumpage price return. The chosen definition of forestry returns makes the model very useful, for example, when speculating on what speed of physical growth is needed to make forestry a competitive investment alternative when both returns and risks are considered.
On the Use of Optimization for Data Mining: Theoretical Interactions and eCRM Opportunities
Authors: Padmanabhan Balaji , Tuzhilin Alexander
Published: December 2003

Previous work on the solution to analytical electronic customer relationship management (eCRM) problems has used either data-mining (DM) or optimization methods, but has not combined the two approaches. By leveraging the strengths of both approaches, the eCRM problems of customer analysis, customer interactions, and the optimization of performance metrics (such as the lifetime value of a customer on the Web) can be better analyzed. In particular, many eCRM problems have been traditionally addressed using DM methods. There are opportunities for optimization to improve these methods, and this paper describes these opportunities. Further, an online appendix (mansci.pubs.informs.org/ecompanion.html) describes how DM methods can help optimization-based approaches. More generally, this paper argues that the reformulation of eCRM problems within this new framework of analysis can result in more powerful analytical approaches.
Revenue Management and E-Commerce
Authors: Boyd E. Andrew , Bilegan Ioana C.
Published: December 2003

We trace the history of revenue management in an effort to illustrate a successful e–commerce model of dynamic, automated sales. Our discourse begins with a brief overview of electronic distribution as practiced in the airline industry, emphasizing the fundamental role of central reservation and revenue management systems. Methods for controlling the sale of inventory are then introduced along with related techniques for optimization and forecasting. Research contributions and areas of significant research potential are given special attention. We conclude by looking at how revenue management is practiced outside of the airline industry, its relationship to dynamic pricing, and future directions for the discipline.
The Digitization of Word of Mouth: Promise and Challenges of Online Feedback Mechanisms
Authors: Dellarocas Chrysanthos
Published: December 2003

Online feedback mechanisms harness the bidirectional communication capabilities of the Internet to engineer large-scale, word-of-mouth networks. Best known so far as a technology for building trust and fostering cooperation in online marketplaces, such as eBay, these mechanisms are poised to have a much wider impact on organizations. Their growing popularity has potentially important implications for a wide range of management activities such as brand building, customer acquisition and retention, product development, and quality assurance. This paper surveys our progress in understanding the new possibilities and challenges that these mechanisms represent. It discusses some important dimensions in which Internet-based feedback mechanisms differ from traditional word-of-mouth networks and surveys the most important issues related to their design, evaluation, and use. It provides an overview of relevant work in game theory and economics on the topic of reputation. It discusses how this body of work is being extended and combined with insights from computer science, management science, sociology, and psychology to take into consideration the special properties of online environments. Finally, it identifies opportunities that this new area presents for operations research/management science (OR/MS) research.
Measuring the Frictional Costs of Online Transactions: The Case of a Name-Your-Own-Price Channel
Authors: Hann Il-Horn , Terwiesch Christian
Published: December 2003

We study the offers submitted by consumers to a large Name-Your-Own-Price (NYOP) online retailer. A distinctive feature of this retailer is that it allows consumers to repeatedly submit offers on one and the same product. While consumers could identify the threshold price (the minimum price for which the retailer is willing to sell) by incrementing their offer in small steps in each consecutive round, such a strategy would require them to go through many additional online transactions. We define frictional cost as the disutility that the consumer experiences when conducting an online transaction, such as submitting an offer. Thus, in our setting, consumers trade off a direct financial value (lower price) for frictional costs. Based on a consumer choice model capturing this trade-off, we use the observed consumer behavior to reconstruct the frictional cost parameters for the consumers in our sample. We show that, perhaps contrary to the general wisdom, frictional costs in electronic markets are substantial, with median values ranging from EUR 3.54 for a portable digital music player (MP3) to EUR 6.08 for a personal digital assistant (PDA). We find that consumers who have gathered experience with the NYOP channel in previous transactions exhibit lower frictional costs than consumers who use the channel for the first time. Surprisingly, sociodemographic variables do not help to explain the variation in frictional costs.
Integrating Long- and Short-Term Contracting via Business-to-Business Exchanges for Capital-Intensive Industries
Authors: Kleindorfer Paul R. , Wu D. J.
Published: December 2003

This paper surveys the underlying theory and practice in the use of options in support of emerging business-to-business (B2B) markets. Such options, on both capacity and output, play an important role in integrating long- and short-term contracting between multiple buyers and sellers in such markets. This trend is especially important in capital-intensive industries, where improvements in fine tuning the coordination of supply and demand carry large economic benefits. Typically, such options are benchmarked (or defined) on the basis of spot market information conveyed through near real-time B2B transactions. This paper notes broad set of goods and services currently being traded in both B2B short-run markets and long-term contract markets, and reviews economic and managerial frameworks that have been proposed to explain the structure of contracting in these markets. We provide a general framework based on transactions cost economics, and we use this framework to provide review and synthesis of existing literature to explain various types of contracting linked to B2B exchanges in capital-intensive industries. The paper concludes with a discussion of implementation challenges and open research questions.
Innovation and Strategic Divergence: An Empirical Study of the U.S. Pharmaceutical Industry from 1920 to 1960
Authors: Lee Jeho
Published: December 2003

Today, firms employing two distinct survival strategies—(1) innovation and (2) imitation —coexist in the U.S. pharmaceutical industry. History indicates that this intraindustry heterogeneity did not exist prior to 1940. This study empirically investigates the origin of this strategic divergence by focusing on changes in firms' R&D inputs and outputs. It finds that some U.S. pharmaceutical firms responded to the opportunity presented by the discovery of antibiotics in the 1940s by investing more in R&D, while many others did not. Over time, the innovators dominated in developing new drugs, and the gap between innovators and imitators steadily increased. These findings also shed light on “the genesis of strategic groups,” a phenomenon that is not yet well understood.
Relative Performance of Incentive Mechanisms: Computational Modeling and Simulation of Delegated Investment Decisions
Authors: Raghu T. S. , Sen P. K. , Rao H. R.
Published: December 2003

This paper evaluates the relative performances of several well–known and widely–used incentive mechanisms under controlled experimental conditions. The scenario utilized is a delegated investment setting where effort and risk aversions contribute to moral hazard among fund managers. Analytical intractability of the problem requires a computational modeling approach to simulate comparative solutions for specific contracts under different parametric settings. Through a simulation exercise, we consider multiple agents who decide their investment strategy over several consecutive periods. Agents learn about estimation and market uncertainty through repeated realizations of investment returns. In each sequence of periods, a number of different incentive mechanisms based on the agent's communication and/or outcome are considered. Results of the computational experiments are presented. Our results overwhelmingly show the efficacy of the incentive contracts in improving the welfare of the investors. In the presence of an estimation risk, when agents learn from their past performances, the market volatility interacts with the estimation risk that makes risk–sharing arrangements such as limited liability overly important. Paying the agent to assume the risk may no longer lead to the best performance incentives.