Hyoduk Shin

Cloud Implications on Software Network Structure and Security Risks

By software vendors offering, via the cloud, software-as-a-service SaaS versions of traditionally on-premises application software, security risks associated with usage become more diversified. This can greatly increase the value associated with the software. In an environment where negative security externalities are present and users make complex consumption and patching decisions, we construct a model that clarifies whether and how SaaS versions should be offered by vendors. We find that the existence of version-specific security externalities is sufficient to warrant a versioned outcome, which has been shown to be suboptimal in the absence of security risks. In high security-loss environments, we find that SaaS should be geared to the middle tier of the consumer market if patching costs and the quality of the SaaS offering are high, and geared to the lower tier otherwise. In the former case, when security risk associated with each version is endogenously determined by consumption choices, strategic interactions between the vendor and consumers may cause a higher tier consumer segment to prefer a lower inherent quality product. Relative to on-premises benchmarks, we find that software diversification leads to lower average security losses for users when patching costs are high. However, when patching costs are low, surprisingly, average security losses can increase as a result of SaaS offerings and lead to lower consumer surplus. We also investigate the vendors security investment decision and establish that, as the market becomes riskier, the vendor tends to increase investments in an on-premises version and decrease investments in a SaaS version. On the other hand, in low security-loss environments, we find that SaaS is optimally targeted to a lower tier of the consumer market, average security losses decrease, and consumer surplus increases as a result. Security investments increase for both software versions as risk increases in these environments.

Public Forecast Information Sharing in a Market with Competing Supply Chains

Studying the operational motivation of a retailer to publicly announce his forecast information, this paper shows that by making forecast information publicly available to both his manufacturer and to the competitor, a retailer is able to credibly share his forecast information-an outcome that cannot be achieved by merely exchanging information within the supply chain. We model a market comprised of an incumbent supply chain facing the possible entry of a competing supply chain. In each supply chain, a retailer sources the product from a manufacturer, and the manufacturers must secure capacity prior to the beginning of the selling season. Due to the superior knowledge of the incumbent retailer about the consumer market, he privately observes a signal about the consumers demand, which may be high or low. We first confirm that the retailer cannot credibly share this forecast information only with his manufacturer within the supply chain, since, regardless of the observed signal, the retailer has an incentive to inflate to induce the manufacturer to secure a high capacity level. However, when the information is also shared with the competitor, the incumbent retailer faces the trade-off between the desire to secure an ample capacity level and the fear of intense competition. By making information publicly available, it is possible to achieve truthful information sharing; an incumbent retailer observing a high forecast benefits from the increased capacity level to such an extent that he is willing to engage in intense competition to prove his accountability for the shared information. On the other hand, an incumbent retailer with a low forecast is not willing to engage in intense competition in exchange for the high level of capacity; thus, he truthfully reveals his low forecast to weaken competition. Moreover, we demonstrate that this public information sharing can benefit all the firms in the market as well as consumers. In addition, we show that compared to the advance purchase contract, all the firms except the incumbent manufacturer can be better off using public information sharing under a simple wholesale price contract. This paper was accepted by Yossi Aviv, operations management.

Designing user incentives for cybersecurity

How to encourage better user security practices and behavior

Optimal Timing of Sequential Distribution: The Impact of Congestion Externalities and Day-and-Date Strategies

The window between a films theatrical and video releases has been steadily declining with some studios now testing day-and-date strategies i.e., when a film is released across multiple channels at once. We present a model of consumer choice that examines trade-offs between substitutable products theatrical and video forms, the possibility of purchasing both alternatives, a congestion externality affecting consumption at theaters with heterogeneous consumer groups, and a decay in the quality of the content over time. Our model permits a normative study of the impact of shorter release windows zero-three months for which there is a scarcity of relevant data. We characterize the market conditions under which a studio makes video release time and price selections indicative of direct-to-video, day-and-date, and delayed video release tactics. During seasons of peak congestion, we establish that day-and-date strategies are optimal for high-quality films with high content durability i.e., films whose content tends to lead consumers to purchase both alternatives whereas prices are set to perfectly segment the consumer market for films with low content durability. We find that lower congestion effects provide studios with incentives to delay release and price the video to induce multiple purchasing behavior for films with higher content durability. However, an increase in congestion effects can, in certain cases, actually lead to higher studio profitability. We also show that, at the lower range of quality, an increase in movie quality should often be accompanied by a later video release time. Surprisingly, however, we observe the opposite result at the upper range of movie quality: an increase in quality can justify an earlier release of the video.

Licensing and Competition for Services in Open Source Software

Open source software is becoming increasingly prominent, and the economic structure of open-source development is changing. In recent years, firms motivated by revenues from software services markets have become the primary contributors to open-source development. In this paper we study the role of services in open source software development and explore the choice between open source and proprietary software. Specifically, our economic model jointly analyzes the investment and pricing decisions of the originators of software and of subsequent open-source contributors. We find that if a contributor is efficient in software development, the originator should adopt an open-source strategy, allowing the contributor to offer higher total quality and capture the higher end of the market while the originator focuses on providing software services to lower end consumers. Conversely, if the contributor is not efficient in development, the originator should adopt a proprietary software development strategy, gaining revenue from software sales and squeezing the contributor out of the services market. In certain cases an increase in originator development efficiency can result in increased contributor profits. Finally, we find that, somewhat counterintuitively, an increase in contributor development efficiency can reduce overall social welfare.

Impact of Downstream Competition on Innovation in a Supply Chain

We explore the impact of downstream competition on upstream innovation in a supply chain consisting of an upstream supplier who invests in innovation and downstream manufacturers who sell to consumers. We show that the impact of downstream competition between manufacturers on innovation depends on the contract form linking the manufacturers and the supplier. If it is the supplier who sets the wholesale price, downstream competition does not affect upstream innovation. However, if it is the manufacturers who set wholesale prices, downstream competition can induce more innovation in a supply chain. If the manufacturers and the supplier bargain, downstream competition can either increase or decrease upstream innovation. Moreover, these results are robust under the presence of a complementary component supplier. We also compare the effects of contract forms in motivating upstream innovation and demonstrate that all firms within a supply chain can be better off by giving the supplier more channel power, i.e., letting the supplier set the wholesale price rather than bargaining.

The Impact of Contracts on Upstream Innovation Incentives in a Supply Chain

We consider a supply chain with an upstream supplier who invests in innovation and a downstream manufacturer. We study the impact of supply chain contracts with upstream innovation, focusing on three different contract scenarios: (i) a wholesale price contract set by the supplier, (ii) a quality-dependent wholesale price contract set by the manufacturer, and (iii) a revenue sharing contract. We confirm that a revenue sharing contract can coordinate a supply chain including investment in innovation, whereas wholesale price contracts may result in under investment in innovation. However, the downstream manufacturer does not always prefer a revenue sharing contract; the manufacturer’s profit can be higher under a quality-dependent wholesale price than that under a revenue sharing contract, specifically when the innovation cost of the upstream supplier is low. We then extend our model to incorporate upstream competition between suppliers. When the competing suppliers set the wholesale price, by inviting upstream competition, the manufacturer can increase his profit substantially to the level in which he has the right to set the quality-dependent wholesale price in a one-to-one supply chain. Furthermore, under the upstream competition, the revenue sharing contract coordinates the supply chain, and is also an optimal contract form for the manufacturer. We also analyze the case of complementary suppliers, and show that our primary results are robust.

Inclusive Innovation: Product Innovation in Technology Supply Chains

Managers introducing new products with advanced component technologies frequently face the dual task of managing both revenues and profits. This task is made challenging, in part, due to the tendency of new technologies to traverse a sequentially downward path of gradually lowering costs and prices, which limits their initial availability and affordability, crimping market coverage and revenues. In this paper, we focus on this product management challenge, show how it is amplified in a supply chain, and propose a new degree of freedom in a supply chain, namely innovation investment anchoring, that offers product managers and their firms the ability to expand market coverage and improve both revenues and profits. After motivating with a detailed industry field-study, we formally characterize the problem and show that deliberate choice of the innovation investment anchor leads to greater investments in innovation, revenues and profits. We compare and contrast product quality improvement and cost reduction investments in a product management setting. These findings have subtle, but important, implications for firms launching innovative products and aspiring to expand product sales and profits. Specifically, innovating firms in a supply chain should broaden the quest for an investment anchor, offer them incentives to invest, and finely tune the level of innovation investment with product qualities, prices, and quantities for increasing revenues and profits.

Business Models for Technology-Intensive Supply Chains

Upstream technology and intellectual property plays an increasingly important role in emerging supply chains by endowing products with digital, data-networking, energy-storage and other sought-after capabilities. In such technology-intensive supply chains, intellectual property invented by an upstream firm must be embedded in a manufactured subsystem which is then integrated into a full system sold to end consumers. Upstream technology providers face key business model decisions about how to monetize their innovation and intellectual property that we study in this paper. They typically employ a royalty-driven business model, but the royalty-based approach has gotten complicated in industrial multi-lateral supply chains necessitating formal research attention. We consider these business model decisions in the context of the industry structure of the subsystem and full system markets which may face varying degrees of competition. We characterize the appropriateness of different business model decisions for markets with varying levels of customer diversity and competitive intensity at intermediate layers. Our key results show that a subsystem-based royalty approach is the optimal business model decision when dealing with monopolistic intermediaries. However, it becomes increasingly optimal for the technology provider to adopt a full-system based royalty business model when the intermediate supply chains face competition and the end-market customer diversity increases. Our formulation and results have significant direct relevance to the prevailing heated global discussion on royalty base among technology providers, national policymakers, and industry groups. We also provide actionable managerial insights on product and business model innovation in technology-intensive supply chains.

Incentives for Forecast Information Sharing Under Simple Pricing Mechanisms

In this chapter we discuss the ability of firms in supply chains to share forecast information using simple pricing mechanisms. Empirical evidence suggests that firms exchange non-verifiable forecast information via informal talk; this stands in sharp contrast with research suggesting that sharing non-verifiable information in this way invites firms to act in an opportunistic way, and, thus, such information should be exchanged using sophisticated signaling or screening mechanisms. We survey the challenges in sharing forecasts in supply chains, and some of the recent answers to this apparent contradiction between the observed industry practice and the suggested mechanisms in research. Specifically, we focus on the way competition between supply-chains serves as an enabler to share forecast information, and the way multiple decisions that are being made based on the shared information enables firms to share non-verifiable information in a “cheap-talk” manner.