Management Insights
Authors: Gorman Michael F. 
Published: September 2013

Eunkyu Lee, Richard Staelin, Weon Sang Yoo, Rex Du How do a firm's choice distribution intensity (number of outlets), channel exclusivity (whether or not the outlets carry only one brand or multiple competing brands), vertical integration (ownership of upstream suppliers and downstream distribution), and multichannel coordination (e.g., setting different prices across different channels for joint profit maximization) affect its profitability under varying levels of brand and outlet differentiation? Major channel structure decisions, although made infrequently, represent important strategic moves. For example, Gateway, a major U.S. personal computer (PC) maker, closed all 188 of its retail stores in 2004 while keeping its Internet channel open. Subsequently, Gateway PCs were made available at third-party retail stores such as Best Buy and Costco, which also carried competing PC brands. In 2006, Apple made a major expansion of its retail efforts by selling its MacBook computers through Best Buy stores throughout the United States, going beyond its own retail and online stores. In 2009, both General Motors and Chrysler closed more than one-third of their dealerships in the United States. In doing so they greatly reduced their distribution coverage, but they also reduced the inter- and intrabrand competition among the dealers. The insight for management: Complex but important strategic supply chain issues can be addressed with mathematical modeling.

Kriti Jain, Kanchan Mukherjee, J. Neil Bearden, Anil Gaba How well can managers gauge the likelihood of future events? For example, experts are often called upon to forecast the price of oil or the level of the Dow Jones Industrial Average (DJIA) at a future point in time, and they use their subjective judgment. However, predictions in such situations tend to be systematically overconfident. The authors of this paper propose a simple process that systematically leads to wider confidence intervals, thus reducing overconfidence. With a series of experiments, including with professionals, they show that “unpacking” the distant future into numerous intermediate more near-term futures systematically improves calibration. In other words, in subjective predictions, a three-month (packed) forecast for the DJIA has a significantly wider confidence interval than one based on one-, two-, and three-month forecasts (unpacked). The insight for management: Take one step at a time; subjective forecasts are more accurate if broken down into successive short-term forecasts.

John Shon, Stanley Veliotis How do insider stock sales affect a firm's ability to meet analyst expectations? The authors find that firms with insider sales executed under Rule 10b5-1 plans exhibit a higher likelihood of meeting or beating analysts' earnings expectations (MBE). Interestingly, this relation between MBE and plan sales is more pronounced for the plan sales of CEOs and CFOs and is nonexistent for other key insiders. The market reactions to firms that successfully meet or beat expectations are relatively positive compared with their peers that fail to do so. One interpretation of the results is that CEOs and CFOs who sell under these plans may be more likely to engage in strategic behavior to meet or beat expectations in an effort to maximize their proceeds from plan sales. However, readers should exercise caution in making inferences, because the potential presence of limit order transactions makes it difficult to unambiguously determine the direction of causality of the relation that we document. The insight for management: Watch the insiders; CEO and CFO stock sales activity is an indicator of future firm performance.

Victor Manuel Bennett How does the sales process during a car purchase affect the transacted price? Negotiated prices are one factor determining whether a vendor or customer captures the value from a transaction. Auto dealerships that systematically negotiate more effectively capture more value. The author examines one dimension of the sales process: whether salespeople handle the entire sale in parallel or customers begin with less experienced salespeople who can escalate difficult assignments. The author uses data from transaction-level data on new car purchases in the United States and a unique survey of dealership management practices to find that a serial process has implications consistent with improving firms' bargaining power and reducing customers' outside options. The insight for management: Designing a serial negotiation process can increase transaction price and close more deals.

Itai Ater Vardit Landsman Do customers learn from experience? The authors study customers' adoption and subsequent switching decisions with regard to a menu of three-part tariff plans offered by a commercial bank. Using a data set of more than 70,000 fee-based checking accounts over 30 months, before and after the introduction of the plans, the authors find that most customers adopt non-cost-minimizing plans, preferring plans with large monthly allowances and high fixed payments. Furthermore, after adoption, customers who exceed their allowances and consequently pay overage fees are more likely to switch to plans with larger allowances than customers who do not experience such fees. Notably, after switching, these overage-paying customers pay higher monthly payments than before. In contrast, switching customers who did not pay overage payments before switching pay less after switching. The authors propose that “overage aversion,” or the fear of conducting more transactions than are covered and thus paying a per-transaction fee, is the most plausible explanation for their findings. The insight for management: Banking customers may have a preference for fixed-fee plans that generate more revenue per customer.

Yan Li, Liyan Yang How does dividend volatility affect asset pricing? The authors establish dividend volatility as a fundamental risk metric that prices assets. They show that dividend volatility positively predicts future asset returns, with the predictive power increasing with the forecasting horizon. They provide supporting empirical evidence that dividend volatility is indeed priced in the data. The insight for management: Dividend volatility affects asset pricing.

Jasjit Singh, Matt Marx Is geographic proximity a contributor to knowledge diffusion? Pockets of expertise such as Silicon Valley in California would suggest that pockets of knowledge and expertise tend to collocate geographically. But why not eastern Arizona or southern Oregon? Most prior work has typically examined this phenomenon considering only one geographic unit—country, state, or metropolitan area—at a time and has rarely accounted for spatial distance. These authors find that both country and state borders have independent effects on knowledge diffusion beyond what just geographic proximity in the form of metropolitan collocation or shorter within-region distances can explain. The puzzling state border effect remains robust on average across analyses, though it is found to have waned with time. The country effect has, in contrast, not only remained robust but even strengthened over time. The insight for management: Political borders matter. Distance alone does not capture geographical colocation; national borders and—to a lesser degree—state borders act as knowledge spillover inhibitors.

Gregory A. DeCroix What is the optimal on-hand inventory to carry if a company's suppliers are subject to disruption? In an assembly system with a single end product and a general assembly structure, the system can be reduced to an equivalent system with some subsystems replaced by a series structure. This reduction simplifies the computation of optimal ordering policies to allow for a heuristic policy for solving the ordering problem. The author finds, surprisingly, that choosing a supplier with a longer lead time can sometimes yield lower system costs. The author also finds that backup supply is more valuable for a supplier with a shorter lead time than for one with a longer lead time. Finally, the author finds that choosing suppliers whose disruptions are perfectly correlated yields lower system costs than choosing suppliers whose disruptions are independent, in contrast to the strategy that is typically preferred when choosing backup suppliers for a single product. The insight for management: Inventory ordering policies for assembly system supply chains with disruptions can lead to revised supply chain management strategies.

Bin Hu, Damian R. Beil, Izak Duenyas How should a supplier price its quotes? The authors study an upstream supplier who quotes prices for a key component to multiple sellers that compete for an end-buyer's indivisible contract. In the case where at most one of the supplier's quotes may result in downstream contracting and hence produce supplier revenue, the authors show that the supplier will use one of two possible types of strategies, with the choice depending on the sellers' profit potentials relative to their uncertainties: secure, whereby the supplier will always have business; or risky, whereby the supplier may not have business. Addressing potential fairness concerns, the authors also study price-quoting strategies in which all sellers receive equal quotes. They show that the supplier's optimal mechanism resembles auctioning a single quote among the sellers. The insight for management: Careful analysis can assist upstream suppliers in their pricing decisions and provide general insights into multitier supply chains' pricing dynamics.

Sreya Kolay, Greg Shaffer Which contract design is more appropriate for supply chain coordination: quantity discounts or two-part tariffs? The authors show that they are equivalent as mechanisms for channel coordination when an upstream firm sells its product in a downstream market that is characterized by a dominant retailer and a competitive fringe. They find that the upstream firm's profit in both settings is independent of whether quantity discounts or two-part tariffs are used. The insight for management: The firm's choice of contract design may turn on which one is easier to implement.

Brennan C. Platt, Joseph Price, Henry Tappen How do risk preferences affect outcomes in pay-to-bid auctions? In pay-to-bid auctions, bidders pay a fee each time they increase the auction price. Bidding fees are the primary source of revenue for the seller, but they produce the same expected revenue as standard auctions (assuming risk-neutral bidders). If risk-loving preferences are incorporated in the model, expected revenue increases. The insight for management: Pay-to-bid auctions are a mild form of gambling.

Dana G. Popescu, Sridhar Seshadri How do different characteristics of product demand and market impact the relative sales volume in the forward and spot markets for a commodity whose aggregate demand is uncertain? In a setting where either the forward contracts are binding quantity commitments between buyers and suppliers or the forward production takes place before the uncertainty in demand is resolved, the authors find that a combination of factors that include market concentration, demand risk, and price elasticity of demand will determine whether a commodity will be sold mainly through forward contracts or in the spot market. Generally, when participants are risk neutral, researchers believe that the ratio of forward sales to spot sales is a function of market concentration alone; also, the lower the concentration, the higher this ratio. The authors find that in some cases, however, even a low level of demand risk can reverse the nature of supply in a highly competitive (low-concentration) market, by shifting it from predominantly forward-driven to predominantly spot-driven supply. In markets with high concentration, the price elasticity of demand will determine whether the supply will be predominantly spot-driven or forward-driven. The insight for management: New hypotheses on the structure of supply in commodity markets are being developed.

Mohammed Abdellaoui, Han Bleichrodt, Olivier l'Haridon, Corina Paraschiv Is happiness absolute, or relative and fleeting? The nature of utility (happiness) is controversial. Whereas decision theory commonly assumes that utility is context specific, applied and empirical decision analysis typically assumes one unifying concept of utility applicable to all decision problems. This controversy has hardly been addressed empirically because of the absence of methods to measure utility outside the context of risk. The authors introduce a method to measure utility over time and compare utility under risk and utility over time. They distinguish between gains and losses and also measure loss aversion. In two experiments they found that utility under risk and utility over time differed and were uncorrelated. Utility under risk was more curved than utility over time. Subjects were loss averse both for risk and for time, but loss aversion was more pronounced for risk. Loss aversion over risk and time were uncorrelated. The insight for management: Loss aversion, although important in both utility over time and utility under risk decision contexts, is volatile and subject to framing.

Hemant K. Bhargava What is the ideal level of mixed bundling with two independently valued goods? The author develops an approximation to an analytically intractable problem that achieves near-optimal solutions in far less time, and he demonstrates the use of this approach with a case study. The insight for management: Simpler methods for improved bundling may achieve better solutions with less effort.