Management Insights
Authors: Gorman Michael F. 
Published: November 2012

Gal Oestreicher-Singer, Arun Sundararajan Are you influenced by Amazon.com's claim, “Customers who bought this item also bought…”? Online markets such as Amazon allow us to explore the effectiveness of links to related products. The authors explore how “product networks” can alter demand spillovers across their constituent items. They review more than 250,000 interconnected books offered on Amazon.com over the course of a year and consumer preferences that are explicitly revealed through shared purchasing patterns. The authors find that these related product links are very effective. They find that newer and more popular products “use” the attention they garner from their network position in electronic markets and their (virtual) shelf position. The insight for management: The explicit visibility of a “copurchase relationship” can lead to as much as a tripling of demand levels for complementary products.

Marie-Pierre Dargnies Research indicates that women do not like competitive environments as much as men do. However, it turns out that men also shy away from competitive environments—when they are competing as part of a team. In a lone competitor situation, men are more likely to participate, but in a team situation the genders are equally likely to participate in a competitive environment, not because women are more likely to participate, but because men are less likely to. The main reason for men's disaffection with team competition appears to be linked to the uncertainty of their teammates' performance in a team tournament. More precisely, high-performing men fear being the victims of the free-riding behavior of their teammates. Women, especially low-performing women, tend to enter the team tournament more often than the individual one when they know that they will be matched to a teammate of the same level as their own. The insight for management: Gender differences in distaste for competitive environments are equalized through team-based competition.

Joseph Pancras, S. Sriram, V. Kumar Managers of retail chains who seek to add new stores or close existing ones need to know the net impact of a store's opening/closing on the overall chain performance. This requires inferring the extent to which each store generates incremental sales as opposed to competing with other stores belonging to the chain for the same set of customers. However, when the chain is experiencing a growth or a decline in sales, not accounting for these dynamics in goodwill is likely to yield misleading estimates of incremental sales versus cannibalization. Moreover, firms might have been strategic in opening outlets in locations with favorable characteristics. The authors find that consumers perceive a travel cost of $0.60 per mile. Because travel costs are relatively high, on average, 86.7% of sales constitute incremental purchases with the rest derived from cannibalized sales from nearby stores belonging to the chain. The authors also find significant decay in cannibalization with distance such that when the distance between stores increases by one mile, the sales lost due to cannibalization decreases by 28.1%; there is virtually no cannibalization at a distance of 10 miles. The insight for management: Managers can use the model presented in this paper to make two key decisions: isolating locations that can be closed by identifying stores that yield the lowest marginal benefit to the chain and dealing with franchisees' potential concerns about cannibalization.

Thomas H. Noe, Michael J. Rebello, Thomas A. Rietz How does the term of financing arrangements affect product quality? While producing high quality is best, defecting to low quality is tempting because it lowers current costs while revenue remains unchanged because consumers and outside investors cannot immediately observe the defection. However, defection to low quality impairs the firm's reputation, which lowers cash flows and inhibits production over the long term. Interestingly, financing via short-term claims discourages defection to low quality because the gains from defection are mostly captured by outside investors through an increase in the value of their claims. The insight for management: If a firm relies on short-term external financing, it is more likely to produce over the long run, produce high-quality goods, and enjoy high profitability.

Fernando Branco, Monic Sun, J. Miguel Villas-Boas Consumers often need to search for product information before making purchase decisions. But how do they decide whether to shop, or stop? Consumers have to decide when enough search is enough when balancing the costs of search with the potential benefits of better product or lower price. The authors develop the optimal stopping rules for either purchase, or no purchase, as a function of search costs and of the importance of each attribute. Given the search behavior of the consumer, sellers can construct pricing strategies that maximize profits. Interestingly, the authors show that lower search costs can hurt the consumer because the seller may then choose to charge higher prices. The insight for management: Understanding search behavior can help improve the probability of sale and improve profits.

Zhixi Wan, Damian R. Beil, Elena Katok Should suppliers always be prequalified? The authors study a procurement setting in which the buyer seeks a low price but will not allocate the contract to a supplier who has not passed qualification screening. Qualification screening is costly for the buyer, involving product tests, site visits, and interviews. The buyer has an incumbent whose quality is known and an entrant that must be screened. The buyer faces a strategic choice about whether to perform qualification screening on the entrant before or after the auction. Under postauction qualification, the incumbent knows he could lose the auction but still win the contract. The incumbent might boycott the auction in this situation, whereas if the participants are fully screened the incumbent's best strategy is always to bid. The insight for management: The timing of quality screening of suppliers directly affects supplier bidding strategy.

Maxim Sinitsyn The Betty Crocker cake mix box tells us, “Frost with Betty Crocker Creamy Deluxe or Whipped Frosting,” but does that influence the consumer's decision on frosting? How does this suggestion affect pricing? Some consumers are “loyals,” who purchase both products from their preferred firm, and some are “switchers,” who choose between product bundles or buy a product in a single category. The switchers are willing to pay some price premium to purchase two complementary products that share the same brand name and are produced by the same firm because they believe that these products are a better match than two complementary products with different brand names. The insight for management: Complementary products should share coordinated pricing and promotion.

David B. Brown, Enrico De Giorgi, Melvyn Sim How does aspiration affect decision making? The authors consider choice over uncertain, monetary payoffs and study a general class of preferences. These preferences favor diversification, except perhaps on a subset of sufficiently disliked acts over which concentration is instead preferred. This structure encompasses a number of known models (e.g., expected utility and several variants under a concave utility function). The authors show that such preferences share a representation in terms of a family of measures of risk and targets. Specifically, the choice function is equivalent to selection of a maximum index level such that the risk of beating the target at that level is acceptable. This representation may help to uncover new models of choice. One that the authors explore in detail is the special case when the targets are bounded. This case corresponds to a type of satisficing and has descriptive relevance. The insight for management: Aspirations affect decision making and risk tolerance.

Marcus Ang, Yun Fong Lim, Melvyn Sim How should storage locations be established and managed to support operations efficiently? Assigning products to and retrieving them from proper storage locations are crucial decisions in minimizing the operating cost of a unit-load warehouse. The problem becomes difficult when the warehouse faces variable supply and uncertain demand. The authors introduce a robust optimization model that minimizes the worst-case expected total travel in the warehouse with distributional ambiguity of demand. The insight for management: A relatively simple policy developed by the authors achieves close to the expected value given perfect information and significantly outperforms other approaches.

Roman Kozhan, Wing Wah Tham Can arbitrage be achieved in high-frequency trading? The authors investigate the role of execution risk in high-frequency trading through arbitrage strategies. They show that if rational agents face uncertainty about completing their arbitrage portfolios, then arbitrage is limited even in markets with perfect substitutes and convertibility. The authors demonstrate that this risk arises from the crowding effect of competing arbitrageurs entering the same trade and inflicting negative externalities on each other. The insight for management: There is execution risk in high-frequency arbitrage.