Management Insights
Authors: Gorman Michael F. 
Published: January 2011

Nitin Bakshi, Stephen E. Flynn, Noah Gans How does terrorism affect international trade? A recently passed U.S. law mandating nonintrusive imaging and radiation detection for 100% of U.S.-bound containers at international ports has provoked widespread concern that the resulting congestion would hinder trade significantly. Using detailed data on container movements gathered from two large international terminals, the authors simulate the impact of the inspection policies that are being considered. They find that the current inspection plan being advanced by the U.S. Department of Homeland Security can handle only a small percentage of the total load, and significant congestion delay will result. An alternate inspection protocol that emphasizes screening—a rapid primary scan of all containers, followed by a more careful secondary scan of only a few containers that fail the primary test—holds promise as a feasible solution for meeting the 100% scanning requirement. The insight for management: New regulations may put a kink in international supply chains, and alternative inspection plans may be necessary.

Özge İşlegen, Stefan Reichelstein For fossil fuel power plants to be built in the future, carbon capture and storage (CCS) technologies offer the potential for significant reductions in carbon dioxide (CO2) emissions. The authors determine the break-even value that encourages CCS adoptions—the critical value in the charge for CO2 emissions that would justify investment in CCS capabilities. The analysis takes into account that the generation of electricity at the wholesale level is organized competitively in some U.S. jurisdictions, but in others a regulated utility provides integrated generation and distribution services. For either market structure, the authors find that emissions charges near $30 per ton of CO2 would be the break-even value for adopting CCS capabilities at new coal-fired power plants. The break-even values for natural gas plants are substantially higher, near $60 per ton. The estimates serve as a basis for projecting the change in electricity prices once carbon emissions become costly; the net effect of such charges is predicted to be a 30% increase in energy prices at the retail level. Interestingly, competitive power markets might see faster price increases than regulated utilities as such charges are put into place. The insight for management: Adoption of carbon capture of fossil fuel plants will require governmental emissions charges and higher energy prices.

Krishnan S. Anand, M. Fazıl Paç, Senthil Veeraraghavan Quality or quantity? An operator or cashier wants to provide ample, high-quality service to each customer to improve their satisfaction with the service provided. But, faced with a queue of customers, individual attention and increased service quality for one customer generally increases the waiting time for all of the others. In such customer-intensive services, the interaction between quality and speed is critical. If the service speed is chosen by the service provider, what is the optimal “quality–speed trade-off”? A provider must define its service parameters based on service quality, delay costs, and price. The authors demonstrate that the customer intensity of the service is a critical driver of equilibrium price, service speed, demand, congestion in queues, and service provider revenues. They show that offering highly customer-intensive service allows the service provider to increase the number of competing servers and increase price, even as the service become slower. The insight for management: In highly customer-intensive service industries, offering longer service times might justify higher prices, even at the cost of longer customer waiting time.

Avi Goldfarb, Catherine E. Tucker Do you feel uncomfortable when you conduct an Internet search, and alongside search results come numerous banner advertisements for similar products or services that you searched for? Clearly, what you search for is being used as information; advertisers use online customer data to target their marketing and increase its effectiveness. However, such “big brother” tactics have heightened consumers' privacy concerns. In the European Union (EU), privacy regulation has been passed that restricts advertisers' ability to collect data on Web users in order to target ad campaigns. The authors study how EU privacy regulation has influenced advertising effectiveness by analyzing the responses of 3.3 million survey takers who had been exposed to 9,596 online display (banner) advertising campaigns. They find that, on average, display advertising became far less effective at changing stated purchase intent after the EU laws were enacted, relative to display advertising in other countries. The loss in effectiveness was more pronounced for websites that had general content (such as news sites), where nondata-driven targeting is particularly hard to do. The loss of effectiveness was also more pronounced for ads with a smaller presence on the webpage and for ads that did not have additional interactive, video, or audio features. The insight for management: Online target advertising based on user behavior is effective, but taken too far it might cause user or regulatory backlash that might reduce the effectiveness of online advertising. Privacy laws may reduce online advertising revenues as a result.

Craig J. Chapman, Thomas J. Steenburgh Should Campbell's Soup offer coupons and discounts to boost sales, meet earnings estimates, and placate analysts? The authors examine different types of marketing expenditures that are used to boost short-term earnings. They combine supermarket scanner data with firm-level financial data and find that soup manufacturers roughly double the frequency and change the mix of marketing promotions (price discounts, feature advertisements, and aisle displays) at the fiscal quarter-end when they have greater incentive to boost earnings. The authors estimate that marketing actions can be used to boost quarterly net income by up to 5% depending on the depth and duration of promotion. However, there is a price to pay, with the cost in the following period being approximately 7.5% of quarterly net income. Their results confirm managers' stated willingness to sacrifice long-term value in order to smooth earnings and their stated preference to use real actions to boost earnings to meet different types of earnings benchmarks. The insight for management: Meeting earnings estimates might placate investors but, in the case of storable goods, only at a real cost to longer-term profitability.

Joseph R. Radzevick, Don A. Moore How much do consultants, engineers, and the like overpromise to make the sale? It depends on the level of competition in the marketplace. The authors investigate how market competition contributes to the expression of overconfidence among those competing for influence. In experiments where advisors try to sell their advice, they find that market competition exacerbates the tendency to express excessive confidence. The insight for management: The tendency in a highly competitive information market is for service providers to overstate capabilities to create differentiation and make the sale.

Laura J. Kornish, Karl T. Ulrich A common approach to innovation, parallel search, is to identify a large number of opportunities and then to select a subset for further development, with just a few coming to fruition. For example, a movie studio might consider numerous scripts, eliminating all but the one they choose to pursue. One potential weakness with parallel search is that it permits repetition: The same, or a similar, idea might be generated multiple times, because parallel exploration processes typically operate without information about the ideas that have already been identified. In the movie studio example, many scripts might have the same premise, resulting in wasted effort of studio executives evaluating the same idea multiple times. The authors analyze repetition in five opportunity data sets from online opportunities to classroom technologies comprising 1,368 opportunities and use that analysis to address three questions. (1) When many efforts to generate ideas are conducted in parallel, how likely are the resulting ideas to be redundant? Although there is some redundancy in the ideas generated by aggregating parallel efforts, the authors find that this redundancy is quite small in absolute terms in their data. (2) At the outside, how many opportunities might be generated if there were abundant time to generate them? The authors extrapolate how many unique ideas would result from an unbounded effort by an unlimited number of comparable idea generators and estimate that the total number of unique ideas is approximately one thousand for the most narrowly defined domain and more than two thousand for the more broadly defined opportunities being explored. (3) Are the unique ideas more valuable than those similar to many others? The authors find a positive relationship between the number of similar ideas and idea value: the ideas that are least similar to others are not generally the most valuable ones. The insight for management: Redundancy of ideas has value. When conducting a search for new ideas to pursue, cluster similar ideas first to reduce wasted effort from redundant evaluation efforts, and focus on the ideas with a common theme, which tend to generate the most value.

Jasjit Singh, Ajay Agrawal Do hiring firms use new recruits' prior inventions? The authors evaluate more than 6,000 U.S. patents and find that firms do leverage recruits' prior inventions heavily. When firms recruit inventors, they acquire not only the use of their skills but also enhanced access to their stock of ideas. However, the authors point out that this does not necessarily reflect widespread "learning by hiring." Often, a recruit's exploitation of her own prior ideas accounts for almost half of the above effect. Interestingly, although one might expect the new recruit's role to diminish rapidly as her tacit knowledge diffuses across the new firm, the authors indicate that the recruit's importance is persistent over time. The insight for management: New ideas can be rapidly gained (leaked) when key employees are recruited into (away from) an organization.

Marie-Claude Côté, Bernard Gendron, Louis-Martin Rousseau This paper presents a new implicit formulation for shift scheduling problems, using context-free grammars to model the rules for the composition of shifts. From the grammar, the authors generate an integer programming (IP) model having a linear programming relaxation equivalent to that of the classical set covering model. When solved by a state-of-the-art IP solver on problem instances with a small number of shifts, the approach yields comparable solution times to other approaches, but, with a large number of shifts, the proposed formulation shows superior performance and can model a wider variety of constraints. The insight for management: New formulation approaches can help with solution speeds for large-scale integer programming problems.

Roy Jones, Haim Mendelson What is the natural market structure for information goods? The authors study markets for information goods and find that they differ significantly from markets for traditional industrial goods. Markets for information goods in which products are vertically differentiated lack the segmentation inherent in markets for industrial goods. As a result, at the extreme, an informational monopoly will offer only a single product. Competition leads to highly concentrated information-goods markets, with the leading firm behaving almost like a monopoly even with free entry and without network effects. The insight for management: The cost structure for informational products naturally drives markets to a highly concentrated, single-product outcome.

Andrew M. Davis, Elena Katok, Anthony M. Kwasnica Do auctioneers pick optimal reserve prices? The authors investigate how auctioneers set reserve prices in auctions. Assuming risk neutrality of the seller, the optimal reserve price should not depend on the number of participating bidders. In a set of controlled laboratory experiments, the authors find that seller behavior often deviates from the theoretical benchmarks. The authors propose three alternative explanations for our results: risk aversion, anticipated regret, and probability weighting. They find that the regret model provides a slightly more favorable fit overall. The insight for management: Regret minimization may cause reserve prices that deviate from expected value-maximizing levels and may cost sellers profits.

Jianying Qiu, Eva-Maria Steiger Can an individual decision maker be risk seeking in one component of a decision and risk avoiding in another? Typically, a curved utility function is used to describe outcome preferences, but, if probability weighting of outcomes is uncorrelated with the utility of outcomes, this description may not be sufficient to capture the complexity of probability and preference weighting. The authors provide experimental evidence that although most individuals exhibit concave utility and convex probability weighting, the two components show no strong positive correlation. The insight for management: Expected utility theory may not adequately capture risk attitudes, and an explicit depiction of risk attitudes is required to capture this complexity.

Ahti Salo, Antti Punkka How can effective benchmarking be conducted when there are extreme outliers? For example, the largest or smallest member of the peer comparison group might be the most or least efficient with respect to its input/output ratios and can skew how the efficiency of other members of the comparison group is perceived. Data envelopment analysis (DEA) is an optimization method that allows benchmarking of “decision-making units” (DMUs) such as bank branches, school districts, and fast food franchises based on their inputs consumed and outputs produced. However, DEA is subject to outlier data. The authors develop ratio-based efficiency analysis based on the DMUs' relative efficiencies. They develop ranking intervals, which indicate the best and worst efficiency rankings that a DMU can attain relative to other DMUs; dominance relations, which show what other DMUs a given DMU dominates in pairwise efficiency comparisons; and efficiency bounds, which show how much more efficient a given DMU can be relative to some other DMU or a subset of other DMUs. Unlike conventional efficiency scores, these results are insensitive to outlier DMUs. They also show how the DMUs' efficiency ratios relate to each other for all feasible weights, rather than the weights that imply the maximal efficiency of a DMU. The insight for management: Benchmarking can be somewhat subjective; this methodology allows for a range of input and output weighting to be tested and derives rankings that are less subject to the input data provided.