Anton Ovchinnikov

Spreadsheet Model Helps to Assign Medical Residents at the University of Vermont's College of Medicine

This paper describes a spreadsheet model that MBA students enrolled in an MS course constructed to replace the manual method of assigning medical residents in radiology to on-call and emergency rotations at the University of Vermonts College of Medicine. Although it contains more than 10,000 variables, the model was easy to build and solve by practitioners who are “lightly educated” in OR/MS. Based on this groups work, we discuss an approach that end-user practitioners can take to create spreadsheet optimization models. We also provide several observations and argue that spreadsheet models can provide an alternative scheduling method for problems of a smaller scope. Despite the major advances in personnel-scheduling methodologies and software, manual scheduling is still the predominant method used for such smaller-scope problems.

Coordinating Pricing and Supply of Public Interest Goods Using Government Rebates and Subsidies

This paper presents a stylized framework for analyzing the design of government incentives for public interest goods (goods with externalities, such as electric vehicles.) We extend the newsvendor model with pricing to account for the consumption externality inherent in public interest goods and analyze the governments ability to coordinate their pricing and supply through the use of rebates and subsidies. Our model allows for goods with both positive and negative externalities, and considers three government intervention mechanisms: the joint mechanism that uses both subsidies and rebates, and two simplified mechanisms that use only rebates or only subsidies. The goal of the intervention is to coordinate the system in order to achieve the maximal welfare, which in our model consists of the firms profit, consumer surplus, and externality benefit net the government cost. We find that the joint mechanism coordinates the system, but results in a negative subsidy (i.e., a tax) unless the externality is very small. The simplified mechanisms mostly result in positive rebates and subsidies, but generally do not coordinate the system. We apply our model to the case of Chevy Volt, a leading electric vehicle in North America manufactured by General Motors. We estimate all model parameters from industry data and present a comprehensive numerical study that compares the current government incentives with those suggested by our model. We find that while the current incentives are structurally suboptimal, the resultant welfare loss under the rebate-only mechanism is very small, while under the subsidy-only mechanism it is quite large.

Balancing Acquisition and Retention Spending for Firms with Limited Capacity

This paper discusses the interaction between revenue management and customer relationship management for a firm that operates in a customer retention situation but faces limited capacity. We present a dynamic programming model for how the firm balances investments in customer acquisition and retention, as well as retention across multiple customer types. We characterize the optimal policy and discuss how the policy changes depending on capacity limitations. We then contrast the modeling results with those of a behavioral experiment in which subjects acted as managers making acquisition and retention decisions. In the modeling part of the paper, we introduce a concept of the value of an incremental customer VIC, and show that when capacity is unlimited, VIC equals customer lifetime value CLV, but when capacity is limited, VIC is much smaller and changes dynamically depending on the number of customers and their mix. As a result, the optimal spending is constant and depends on CLV for the firms with unlimited capacity, but changes dynamically and is generally unrelated to CLV when capacity is limited. In the experimental part, we introduce a concept of conditional optimality for the analysis of state-dependent decisions. Applying this concept to our data, we document a number of decision biases, specifically the subjects tendency to overspend on retaining high-value customers and underspend on lower-value customers retention and acquisition. We show that providing CLV information exacerbates these biases and leads to a loss of net revenue when capacity is limited, but providing information about the marginal costs of acquisition and retention eliminated these biases and increases net revenue. n nData, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1842 . n nThis paper was accepted by Yossi Aviv, operations management.

Economic, Environmental, and Social Impact of Remanufacturing in a Competitive Setting

This paper studies the environmental and social trade-offs of remanufacturing for product+service firms under competition. We use an analytical model and a behavioral study that together incorporate demand cannibalization from multiple customer segments across the competing firms’ product lines. We measure firms’ profits, consumer surpluses, environmental impacts, and environmental costs along the products lifecycles in the resultant equilibria with and without remanufacturing. We show that competition intensifies the tension between increased profit and worsened environmental impact from market expansions caused by remanufacturing identified by prior research in the case of monopoly. However, bringing in the social dimension leads to an overall positive assessment: remanufacturing creates additional consumer surplus, which compensates for the cost of the environmental impact. In other words, we found strong support that remanufacturing is beneficial for the society.

Constrained group balancing: Why does it work

We consider a problem where a set of objects possessing multiple attributes must be partitioned into a certain number of groups so that the groups are as balanced as possible with respect to the number of objects possessing each attribute. This multi-criteria decision problem arises in a variety of practical applications, ranging from assigning students to study groups to designing level schedules for JIT assembly lines. A direct approach, enforcing balance through hard constraints, may lead to infeasibility, but works well in practice. We analyze this phenomenon from the worst-case and empirical perspectives, as well as through an in-depth analysis of one representative practical application - the design of student groups at the Rotman School of Management, University of Toronto. The goals of the analysis are to understand what classes of balancing problems may contain infeasible instances and how prevalent such instances are within these classes, as well as to synthesize practical managerial insights that a decision maker could follow in order to increase the chances that balanced groups can be found.

Strategic Consumers, Revenue Management, and the Design of Loyalty Programs

In this paper, we study the interaction between revenue management and a premium-status loyalty program, as well as the role of strategic consumers in this interaction. Specifically, we consider a contemporaneous change where firms across several industries switch their loyalty programs from quantity/mileage-based (under which consumers obtain status by flying a certain number of miles) to spending-based (under which consumers obtain status by spending a certain number of dollars). This change has been met with fierce opposition from the media and consumers. We present a model for strategic, forward-looking, and status-seeking consumers decisions on how much to purchase/fly over a certain time period, and endogenously derive the strategic consumer demand as a function of the firms prices and loyalty program parameters. We then incorporate such demand into the firms pricing and loyalty program design problem and compare the solutions under different loyalty program designs: the mileage- and spending-based programs, as well as the enhanced mileage programs with the selling of miles and bonus miles features. We show that the spending-based program is more profitable than the mileage-based program, and that a switch to a spending-based program can be Pareto-improving: the firms profit can increase, yet no consumers will be worse off. We also show that the enhanced mileage programs can be even more profitable than the spending-based program. Finally, we demonstrate that when the firm coordinates its pricing and loyalty decisions, it can benefit from strategic consumer behavior, and provide a detailed examination for how firms loyalty program designs could alter strategic consumer behavior to increase profitability.

The Impact of Behavioral Ordering on Profits Under Competition: An Experimental Investigation

We investigate the impact of behavioral ordering on a firm’s profits. Specifically, since most firms operate in competitive markets, we evaluate the differences in profits between a behavioral competitor at which a human is placing orders, and a management science-driven competitor at which orders are decided according to a plausible policy based on existing literature and managerial practice. In contrast to the current literature which documents profit losses of 1-5% (in isolated cases), we show that profit losses under competition are 20-60%, an order of magnitude larger. We explain the causes of such large differences in profits, and show that they are primarily driven by suboptimal ordering of behavioral decision makers rather than by the sophistication of their management-science-driven competitors. Our results send a clear message to business executives, and highlight the importance of considering (and correcting) behavioral biases in ordering decisions of their inventory managers.

Dynamic Pricing in the Presence of Strategic Consumers: Theory and Experiment

We investigate the impact of strategic consumer behavior on retailers dynamic pricing decisions. We present a stylized two-period model, and test the equilibrium predictions in a set of behavioral experiments in which human subjects played the role of pricing managers. Our main insight is that relative to equilibrium predictions, subjects underprice in the main selling season. Consequently, they sell more inventory and obtain higher revenue in that season. However, by doing so they significantly limit their ability to generate revenue in the markdown season, which, in the presence of strategic consumers is a major source of revenue.

The Impact of Inventory Risk on Market Prices

This paper demonstrates and explains a surprising effect: that an increase in the number of competing firms may lead to an increase in the equilibrium market price in a situation when firms compete on both price and quantity (inventory/capacity). We attribute this effect to inventory risk: the potential mismatch between the firm’s inventory and demand that occurs if the firm incorrectly judges how much additional demand it will generate if it lowers the price. As we show, such a risk increases in the number of competitors, making firms’ inventory management a lot more difficult and costly, hence triggering an increase in equilibrium prices. We use the concept of quantal response equilibrium to model competition between boundedly rational firms, illustrate the price increase, and then examine how it changes depending on the number of competitors, the degree of their rationality, and the composition of market demand and firms’ costs.

Heterogeneity of Reference Effects in the Competitive Newsvendor Problem

This paper incorporates the recently-proposed optimism-based reference point formulation into a competitive newsvendor model. The analysis shows that the heterogeneity of newsvendors reference points can explain several regularities observed in recent experimental studies of newsvendor competition. Specifically, the observations that a behavioral newsvendor may ignore the orders of the competitor, receive a significantly smaller profit, or over-order when there is no expected demand overflow can all be attributed to the effects of heterogeneous reference points in our models equilibrium. Extending the model to a two-tier supply chain also provides insights onto how behavioral biases impact wholesale price contracts.