Daewon Sun

Progress in Web-based decision support technologies

World Wide Web technologies have transformed the design, development, implementation and deployment of decision support systems. This article reviews and summarizes recent technology developments, current usage of Web-based DSS, and trends in the deployment of such systems. Many firms use the Web as a medium to convey information about DSS products or to distribute DSS software. The use of Web-based computation to provide product demonstrations or to deploy DSS applications for remote access remains less common. The academic literature on Web-based DSS is largely focused on applications and implementations, and only a few articles examine architectural issues or provide design guidelines based on empirical evidence.

Stockout Compensation: Joint Inventory and Price Optimization in Electronic Retailing

Delays in product availability are common in e-commerce where electronic retailers try to manage with very low inventories. While this lowers inventory costs, the negative effect of increased stockouts is to reduce net demand for the product. We analyze the effect of offering a lower price during stockout to compensate for a customers waiting time, using an EOQ-type inventory-modeling framework but solving simultaneously for both the optimal prices and the lengths of the in-stock and stockout periods. The lower price recaptures some lost demand and has an important synergistic effect: the increased sales rate leads to lower unit costs for inventory holding and product ordering. Stockout compensation improves market efficiency and increases the retailers sales and profit. The optimal stockout-compensation policy is to choose period lengths and prices such that the two periods have equal effective prices (i.e., the optimal stockout compensation equals the average waiting cost for a customer). Compared with the pure wait-free and stockless-operation policies, stockout compensation not only yields greater profits, but also greater revenues, lower unit costs, and increased consumer surplus and market coverage. Compared with a backorder policy without compensation, the stockout compensation policy improves profits and social welfare but at the expense of consumer surplus. Allowing for strategic consumer behavior under knowledge of future prices, the equal-effective-prices solution defines a rational-expectations equilibrium.

Coordinating a Supply Chain With a Manufacturer-Owned Online Channel: A Dual Channel Model Under Price Competition

We consider a dual channel supply chain in which a manufacturer sells a single product to end-users through both a traditional retail channel and a manufacturer-owned direct online channel. We adopt a commonly used linear demand substitution model in which the mean demand in each channel is a function of the prices in each channel. We model each channel as a newsvendor problem, with price and order quantity as decision variables. In addition, the manufacturer must choose the wholesale price to charge to the independent retailer. We analyze the optimal decisions for each channel and prove the existence of a unique equilibrium for the system. We compare this equilibrium solution to the solution for an integrated system, in which the manufacturer owns both the online store and the retailer. To enable supply chain coordination, we propose two contract schemes: a modified revenue-sharing contract and gain/loss sharing contract. We show that, in cases where the retail channel has a larger market than the online channel, such contracts enable the manufacturer to maintain price discrimination, selling the products in different channels at different prices. Finally, we perform a comprehensive numerical study to consider the impact of the model parameters on the equilibrium and to demonstrate the performance of the proposed coordination contracts. We conclude that coordination is most critical for products which are highly price sensitive and for systems in which the online and traditional retail channels are not viewed as close substitutes.

A Test of Two Models of Value Creation in Virtual Communities

Does a firm get any extra value from investing resources in sponsoring its own virtual community above and beyond the value that could be created for the firm, indirectly, via customer-initiated communities? If so, what explains the extra value derived from a firm-sponsored virtual community and how might this understanding inform managers about appropriate strategies for leveraging virtual communities as part of a value-creating strategy for the firm? We test two models of virtual community to help shed light on the answers to these questions. We hypothesize that in customer-initiated virtual communities, three attributes of member-generated information (MGI) drive value, while in firm-sponsored virtual communities, a sponsoring firms efforts, as well as MGI, drive value. Drawing on information search and processing theories, and developing new measures of three attributes of MGI (consensus, consistency, and distinctiveness), we surveyed 465 consumers across numerous communities. We find that value can emerge via both models, but that in a firm-sponsored model, a sponsors efforts are more powerful than MGI and have a positive, direct effect on the trust-building process. Our results suggest a continuum of value creation whereby firms extract greater value as they migrate toward the firm-sponsored model.

Pricing under quality of service uncertainty: Market segmentation via statistical QoS guarantees ☆

This article examines how performance-contingent pricing schemes with long-term statistical performance guarantees can be applied to many IT services. We study two forms of performance-contingent pricing, with rebate proportional to failure rate and fixed rebate for below-threshold performance. We show that threshold-performance contingency pricing can increase both profits and fairness (customers who receive higher benefits pay higher effective price) relative to standard pricing. But an even better solution is to offer a menu of performance guarantees: this can increase the firms profit and segment the market. Only service providers whose performance level is sufficiently better than the industry standard can benefit from this pricing mechanism.

Dual mechanism for an online retailer

Abstract While posted price and auction have typically been seen as alternatives to each other, we observe Web stores selling a product at a posted price and simultaneously running auctions for the identical product, a phenomenon that has not been studied fully. In this article, we study a dual mechanism, where an online retailer combines the two conventional mechanisms (posted price and auction) for multiple units of a product. We demonstrate that the dual mechanism can be used to achieve market segmentation when customers discount the expected utility of auctions. We characterize the customer’s decision rule and formulate a retailer’s profit function under the dual mechanism. Finally, we compare the performance of three selling mechanisms (posted price, auction, and dual) through computational experiments.

Commercialization of Platform Technologies: Launch Timing and Versioning Strategy

Many emerging entrepreneurial applications and services connect two or more groups of users over Internet-based information technologies. Commercial success of such platform technology products requires adoption of astute business practices related to product line design, price discrimination, and launch timing. We examine these issues for a platform firm that serves two markets, labeled as user and developer markets, with the latter emerging after the user market is proven. While the size of each market positively impacts participation in the other, our model allows for uncertainty regarding developer participation. We demonstrate that product versioning is an especially attractive strategy for platform firms, i.e., the tradeoff between market size and margins is tilted in the direction of more versions. However, when expanding the product line carries substantial fixed costs (e.g., marketing cost, cost of additional plant, managing multiple sets of inventory, increased distribution cost) then the uncertainty in developer participation adversely impacts the firm’s ability to offer multiple versions. We show that for established firms with lower uncertainty about developer participation, the choice is essentially between an expanded or minimal product line. Startups and firms that are entering a new product category are more likely to benefit from a “wait and see” deferred expansion strategy. Still, we demonstrate that uncertainty in developer participation can make early expansion desirable because it expands the installed base and, with the consequent increase in developer participation levels, increases the long-term incremental gain from product line expansion.

Impact of supply chain power and drop-shipping on a manufacturer’s optimal distribution channel strategy

With the expansion of the Internet and the proliferation of e-businesses, many manufacturers have chosen to distribute products through online retail channels in addition to brick-and-mortar retail channels. In this paper, we consider a dual-channel supply chain in which a manufacturer considers selling a product through a conventional retail channel and an online channel. Considering two common procurement and order fulfillment policies for online retailers (etailers), conventional batch ordering and drop-shipping, we investigate the impact of supply chain power structure in terms of market power and retail channel dominance on a manufacturer’s optimal distribution channel strategy. We analyze and compare the two procurement models with respect to the etailer’s order fulfillment policies. We find that a manufacturer never prefers a drop-shipping etailer as the first mover in a sequential pricing game with a batch ordering traditional retailer. The manufacturer prefers to award the power of retail channel dominance to a batch ordering retailer with relatively high market power even if the etailer also follows a batch ordering policy. Drop-shipping benefits both the manufacturer and the etailer when the etailer has relatively low market power.

Equity-Based Incentives and Supply Chain Buy-Back Contracts*

We analyse the effect of equity-based incentives in a supply chain with a downstream firm and an upstream supplier. By using the operational decision as a signal to influence external investors’ beliefs, the downstream firm’s manager intends to maximize a convex combination of the interim share price and the terminal cash flows. We show that equity-based incentives create a side-effect. Specifically, with a universal buy-back contract, the deadweight loss of signalling induced by equity-based incentives could spread throughout the supply chain and cause chain-wide damages. To mitigate such undesirable consequences, we propose a new mechanism to eliminate the inefficiency. We derive the optimal mechanism that maximizes the downstream firm’s profits subject to the constraint that the supply chain efficiency is not undermined. In contrast to the full-information benchmark, this mechanism gives positive surplus to the supplier.

Performance-Contingent Pricing for Broadband Services

Market segmentation and price differentiation is considered essential to improve the market efficiency of Internet access and data transport services. The market for cable Internet access exhibits a surprising lack of segmentation, despite a high degree of customer heterogeneity. This article examines the applicability of performance-contingent pricing schemes to broadband Internet access services, with long-term (rather than per-packet) statistical performance guarantees. We study two types of contingent price contracts, with rebate proportional to performance gap, and fixed rebate for below-threshold performance. We show that threshold-performance contingency pricing can increase both profits and fairness (customers who receive higher benefits pay higher effective price) relative to standard pricing. A menu of pricing schemes (allow customers to choose between standard and contingent pricing) works even better: it can increase the firm’s profit and segment the market.