Leon Yang Chu

Agent Competition Double-Auction Mechanism

This paper proposes an agent competition double-auction mechanism to simplify decision making and promote transactions for the customer-to-customer marketplaces. Under the proposed double-auction mechanism, bidding ones true valuation (private information) is the best strategy for each individual buyer and seller even when shipping costs and sales taxes are different across various possible transactions. The proposed mechanism also achieves budget balance and asymptotic efficiency. Furthermore, these results not only hold for an environment where buyers and sellers exchange identical commodities, but also can be extended to an environment with multiple substitutable commodities.

Solving operational statistics via a Bayesian analysis

For the newsvendor problem with ambiguous demand, it is known that integrating parameter estimation and optimization using operational statistics leads to better solutions compared with the traditional approach. However, it is an open question how to find the optimal operational statistic. We show how to do it in this paper.

Optimal Preorder Strategy with Endogenous Information Control

In this paper, we investigate the integrated information and pricing strategy for a seller who can take customer preorders before the release of a product. The preorder option enables the seller to sell a product at an early stage when consumers are less certain about their valuations. We find that the optimal pricing strategy may be highly dependent on the amount of information available at preorder and that a small change in the latter may cause a dramatic change in the proportion of consumers who preorder under optimal pricing. Furthermore, the sellers optimal information strategy depends on a key measure, the normalized margin, which is the ratio between the expected profit margin and the standard deviation of consumer valuation. Although the seller may want to release some information or none, she should never release all information. Finally, under the optimal information and pricing strategy, the benefit of preorder is most pronounced when the normalized margin is in a medium range. This paper was accepted by Martin Lariviere, operations management.

Truthful Bundle/Multiunit Double Auctions

We address the mechanism design problem for a market with multiple buyers and sellers. Each buyer demands some bundle(s) of various commodities, and each seller supplies multiple units of one commodity. To design truthful double-auction mechanisms, we propose a novel “padding” method that intentionally creates imbalances between the supply availability and demand requirement by introducing a phantom buyer with unlimited budget. To the best of our knowledge, this “padding” method leads to a class of mechanisms that are the first strategy-proof, individually rational, budget-balanced, and asymptotically efficient mechanisms for the specified exchange environment. Furthermore, these mechanisms dominate known truthful bundle/single-unit mechanisms with higher efficiency, lower buying prices, and higher selling prices.

Salesforce Contracting Under Demand Censorship

We study salesforce contracting in an environment where excess demand results in lost sales and the demand information is censored by the inventory level. In our model, a firm contracts with a risk-neutral sales agent with limited liability whose effort increases the demand stochastically. The firm designs the incentive contract and invests in inventory; the agent decides the sales effort. We find that the sales-quota-based bonus contract is optimal in such an environment, and the quota should be set equal to the inventory level when the first-best solution is not attainable. We further reveal that demand censorship can introduce peculiar effects on the optimal sales effort and service level that the firm implements. From our analysis of the additive and multiplicative effort cases, we find that in the additive effort case, it can be optimal, under demand censorship, for the firm to induce an effort and maintain a service level both greater than those under the first-best solution. Scenarios also exist where the firm should induce zero effort. For the multiplicative effort case, the optimal sales effort under demand censorship is lower than the first-best effort, whereas the optimal service level is higher than the first-best service level. The agent earns zero rent in the additive effort case but may earn a positive rent in the multiplicative effort case. Finally, our numerical analysis shows that demand censorship can have a significant negative impact on the value of contracting with the sales agent, especially when the sales margin is low and the market uncertainty is high.

Trade reduction vs. multi-stage: A comparison of double auction design approaches

With the growth of electronic markets, designing double auction mechanisms that are applicable to emerging market structures has become an important research topic. In this paper, we investigate two truthful double auction design approaches, the Trade Reduction Approach and the Multi-Stage Design Approach, and compare their resulting mechanisms in various exchange environments. We find that comparing with the Trade Reduction Approach, the Multi-Stage Design Approach offers mechanisms applicable to more complicated exchange environments. Furthermore, for the known trade reduction mechanisms, we prove that the corresponding mechanisms under the multi-stage design approach are superior in terms of both social efficiency and individual payoffs, in each exchange environment of interest. Our computational tests show that the mechanisms under the multi-stage design approach achieve very high efficiency in various scenarios.

A note on optimal procurement contracts with limited direct cost inflation

Abstract Laffont and Tiroles [Using cost observation to regulate firms, J. Polit. Econ. 94 (1986) 614–641] pioneering analysis identifies the optimal procurement contract when the supplier can readily inflate his innate production cost without detection. When the buyer has some ability to limit such cost inflation, an alternative contract can outperform the contract identified by Laffont and Tirole. The alternative contract induces substantial pooling, discontinuous production costs and effort supply, and rent that varies non-monotonically with innate cost.

Designing flexible systems using a new notion of submodularity

Abstract We study the problem of optimal flexibility capacity portfolio selection by introducing a new notion of submodularity for correspondences, which extends the classical notion of submodular functions. In particular, we prove that the correspondence that maps flexible resources to the set of demands that they can process is submodular, and use the properties of submodular correspondences to compare different flexibility configurations and derive insights into the optimal capacity portfolio.

Optimal Pricing and Inventory Planning with Charitable Donations

Problem definition : This paper investigates firms’ optimal operational decisions and after-tax profits with regard to tax deduction for charitable donations. Academic/practical relevance : Motivated by the steady growth in noncash donations from U.S. companies, our work is the first to provide theoretical guidance on operational planning under tax deduction for both precommitted donations and end-of-season donations. Methodology : We analyze the impact of tax deduction for a profit-driven firm under a two-period price-markdown newsvendor model and characterize the firm’s optimal price and quantity decisions. Results : The firm’s optimal donation behavior is driven by two factors—fixed cost and demand uncertainty. Specifically, a positive fixed cost can induce precommitted donation during the regular selling season, and demand uncertainty can induce end-of-season donation during the clearance period. Managerial insights : The enhanced tax deduction that is designed to encourage charitable donations results in unexpected behavior by the firm. For example, the firm’s optimal clearance price can increase with the amount of leftover inventory, and the firm’s optimal after-tax profit can increase as the tax rate increases. While the value of the deduction is tied to the fair market value (and the price) of the product, surprisingly, the firm may find it more profitable to charge a lower price, because the lower price may scale up the demand uncertainty and consequently increase the expected tax subsidy under the enhanced tax deduction. Our analysis reveals important insights about the impact of the tax law on a monopolist’s optimal operational decisions and profit.