Brian Mittendorf

Using Return Polices to Elicit Retailer Information

We show that a manufacturer may prefer to offer a return policy when dealing with a retailer who holds advance knowledge about market conditions. Roughly stated, the manufacturer offers a liberal return allowance in lieu of a lower price to satisfy a retailer facing unfavorable market conditions. A retailer facing favorable conditions finds this tradeoff unattractive because he is likely to sell the merchandise anyway and thus not make as much use of the generous return terms. As a consequence, a retailer is less inclined to misstate market conditions. By serving as an additional control instrument, a returns policy reduces the manufacturers need to ration (cut) production.

Discretionary Disclosure of Proprietary Information in a Multisegment Firm

The seminal “unraveling” result in the disclosure literature posits that discretion inevitably leads to full disclosure, even when such disclosure has detrimental consequences. In this paper, we revisit optimal disclosure of proprietary information when firms compete in multiple markets. The analysis demonstrates that in the presence of multiple segments, the unraveling result applies at the firmwide level but not necessarily segment by segment. Instead, when the firm has an ex ante desire to withhold information and segments are sufficiently similar, the ex post disclosure equilibrium entails aggregation of segment details. Aggregation arises because any ex post temptation to disaggregate and reveal particularly favorable news in one segment entails revealing unfavorable news in another segment. A desire to balance profits across segments then leads a firm to disclose firmwide information (a temptation that cannot be avoided), but only in the aggregate.

Friction in Related-Party Trade When a Rival Is Also a Customer

There are many circumstances in which manufacturers provide inputs to wholesale customers only to subsequently compete with these wholesale customers in the retail realm. Such dual distribution arrangements commonly suffer from excessive encroachment in that the manufacturers ex post retail aggression is harmful ex ante because it undercuts potential wholesale profits. This paper demonstrates that with dual distribution, a manufacturer can benefit from decentralized control and the use of transfer prices above marginal cost. Although these arrangements often create coordination concerns, a moderate presence of such concerns permits the manufacturer to credibly convey to its wholesale customer that it will not excessively encroach on its retail territory. This, in turn, permits the manufacturer to reap greater wholesale profits. We also note that this force can point to a silver lining in arms-length (parity) requirements on transfer pricing in that they can solidify commitments to a particular retail posture.

Pricing Internal Trade to Get a Leg up on External Rivals

The pricing of transfers from parent to subsidiary is an oft-explored issue. Linking the cost of internal transfers with external market prices is one common approach, typically justified when the market for the good is perfectly competitive. This paper shows that imperfect competition may also justify market-based transfer prices. Concern that transfer price will deviate from marginal cost and thereby distort subsidiary choices can lead a parent to undertake actions to influence the market price of the upstream good. Such efforts can provide a desirable strategic posture in the upstream market.

Managing Strategic Inventories via Manufacturer-to-Consumer Rebates

Manufacturer-to-consumer rebates are a staple of modern supply chains. Such rebates are typically viewed as a means of price discrimination because of partial redemption by consumers. However, the proliferation of universally redeemed instant rebates suggests the practice may be motivated by additional considerations, an issue we tackle in this paper. Our results demonstrate that consumer rebates can be particularly useful when a supply chain encounters inefficiencies stemming from strategic inventory buildup by retailers. Wary of high wholesale prices, a retailer may hold excess inventory to convey a lower willingness to pay in future interactions and thereby strategically undercut future wholesale prices. As a retaliatory consequence, the manufacturer sets high near-term wholesale prices. The “pull” promotion from consumer rebates encourages more timely retail sales and in doing so undercuts but does not eliminate the retailers strategic inventories. In other words, the introduction of consumer rebates can serve as an enticement for retailers to sell, not just for consumers to buy. Perhaps surprisingly, we find that the manufacturer, retailer, and consumers alike all benefit from the use of rebates, this despite the fact that the manufacturer uses the rebates in self interest and as a strategic weapon. This paper was accepted by Yossi Aviv, operations management.

Input Price Discrimination When Buyers Operate in Multiple Markets

This paper revisits third-degree price discrimination when input buyers serve multiple product markets. Such circumstances are prevalent since buyers often use the same input to produce different outputs, and even homogenous outputs are routinely sold through different locations. The typical view is that price discrimination stifles efficiency (and welfare) by resulting in price concessions to less efficient firms. When buyers serve multiple markets, price discrimination leads to price breaks for firms in markets with lower demand. When lower demand markets also have less competition, price discrimination can provide welfare gains by shifting output to less competitive markets.

Input Markets and the Strategic Organization of the Firm

Organizational structure of firms is an important topic that has been widely discussed in virtually all management disciplines. The typical view of firm organization emphasizes enhancing efficiency by fully aligning incentives of all participants to achieve a common objective. Over the years, research in accounting, economics, and marketing has stressed how competition in output markets can alter this view. More recently, there has been an emphasis on how a firms concurrent participation in input markets, wherein strategic supplier considerations are in play, can further alter the traditional view of organizational structure. This monograph seeks to synthesize such results and present the key considerations and conclusions that can be gleaned from this research. In doing so, the monograph emphasizes implications for accounting but also stresses the inherent interconnectivity with issues in industrial organization, strategy, and regulation.

Accounting Discretion and Managerial Conservatism: An Intertemporal Analysis Discussion of "Accounting Discretion and Managerial Conservatism: An Intertemporal Analysis"

Accounting discretion and the principle of conservatism are two salient features embedded in financial reporting systems. Arguably, the practice of conservative accounting choices can never be well understood without incorporating their effect on future periods (the intertemporal effect). This paper provides one explanation for managerial conservatism in a two-period agency model with hidden information (a binary project type) and hidden actions (the agents efforts). A piece-wise linear incentive scheme with accounting earnings as the performance measure is employed. The agents discretion is the choice of a depreciation method. Discretion is valuable if and only if the agents marginal productivity of a bad project is greater than that of a good project but not to an extreme degree. A conservative depreciation method decreases current compensation in exchange for a bet on future compensation and, hence, serves as a commitment device for the agent to signal the prospect is indeed good. The accounting mechanism replicates the performance of the optimal direct mechanism.

The middleman as a panacea for supply chain coordination problems

The prevalence of intermediaries (middlemen) in supply chains is often seen as a dying remnant of less efficient times. Despite predictions that supply chains will rapidly “cut out the middleman” as technological advances have eased logistics, middlemen have continued to thrive. In this paper, we demonstrate a transaction role of middlemen that may help clarify their staying power. In a model with self-interested decision-making by both a manufacturer and a retailer, wherein incentive misalignment creates investment and production inefficiencies, we show that the integrated (first-best) outcome can be achieved with simple cost-based contracts if and only if a middleman is present. We further show that the approach of utilizing a middleman to fully coordinate the supply chain is robust in that it can be applied to a variety of circumstances discussed in the literature, including multilateral investment/effort choices, multiple product providers, and logistical investments made by the middleman.

Project Assignments When Budget Padding Taints Resource Allocation

This paper shows that rotation programs can be an effective response to concerns of employee budget padding. Rotation programs naturally create a “portfolio” of assignments for each manager, and the resulting diversification can reduce the downside of resource rationing. In particular, the production versus rents trade-off linked with adverse selection problems can be more efficiently carried out when the firm faces two managers with average information advantages, rather than one with a large advantage and one with a small advantage. Roughly stated, rotation of project assignments is a way of smoothing information across managers. On the other hand, if a firm places a premium on treating different types of projects in distinct ways, specialized assignments can be preferred due to the ability to confine project types to individual managers.