Om Narasimhan

From Invention to Innovation: Conversion Ability in Product Development

The ability to convert inputs into outputs is a critical determinant of success in many fields of endeavor. In this research, the authors study the ability of firms to convert ideas into products, that is, their conversion ability. Specifically, they address the question, Why are some firms better at conversion than others? In contrast to much of the existing literature, the authors propose that a strong focus on speed and on generating many ideas may actually hurt firms by lowering their conversion ability. The authors test their arguments on data between 1960 and 2001 from a cross-national sample of pharmaceutical firms. They find that firms vary widely in their ability to convert promising drug ideas into launched drugs. Firms with the highest conversion ability are those that (1) focus on a moderate number of ideas, in areas of importance, and in areas in which they have expertise and (2) deliberate for a moderate length of time on promising ideas.

Understanding the Role of Trade-Ins in Durable Goods Markets: Theory and Evidence

The act of trading in a used car as partial payment for a new car resonates with practically all consumers. Such transactions are prevalent in many other durable goods markets, ranging from golf clubs to CT scanners. What roles do trade-ins play in these markets? What motivates the seller to set up a channel to facilitate trade-ins? Intuitively, accepting a trade-in would appear to stimulate demand for the producers product, but facilitating the resale of these used goods that substitute for new goods might also increase cannibalization. Although such transactions involve billions of dollars, we know relatively little about this practice from the extant research literature. This paper develops an analytical model that incorporates key features of real-world durable goods markets: (i) coexistence of new and used goods markets, (ii) consumer heterogeneity with respect to quality sensitivity, (iii) firms that anticipate the cannibalization problem arising from the coexistence of new and used goods, and (iv) lemon problems in resale markets, whereby sellers of used goods are better informed than buyers about the quality of their particular item. In our analysis, a trade-in policy amounts to an intervention by the firm in the used goods market, which reduces inefficiencies arising from the lemon problem. It motivates owners to purchase new goods and reduces their proclivity to hold on to purchased goods because of the low price the latter would fetch in a lemon market. We also show that trade-in programs are more valuable for less reliable products, as well as for products that deteriorate more slowly. Our analysis shows that producers in durable goods markets should consider trade-in programs as a matter of routine. Despite cannibalization concerns arising from a more active resale market, a producers profits will inevitably rise from introducing trade-ins, given pervasive lemon problems. We test the key predictions of the model about price and volume of trade by assembling a data set of transactions of U.S. automobile consumers and find broad support for our model.

An Empirical Investigation of Private Label Supply by National Label Producers

Private labels PLs are ubiquitous in several categories, including groceries, apparel, and appliances. However, existing empirical work has not examined the differential impact of various upstream supply arrangements for PL products or the strategic motives for PL supply. To do so requires one to model the interaction between private and national label NL products both upstream and downstream while accounting for strategic behavior on the part of manufacturers and retailers and retaining essential differences between NL and PL products. We build a model that satisfies these requirements and lets us answer our two research questions: First, can an NL firm profit from being an outsourced PL supplier? Second, what are the upstream and downstream impacts of different PL supply arrangements? We answer these questions by modeling private labels as homogenous products at wholesale, but as differentiated products at retail. In contrast, national label products are differentiated at both wholesale and retail levels. Using structural model estimates for fluid milk in a major metropolitan area, we conduct three counterfactual experiments. We find that both NL producers and retailers profit from adding private labels. We also find that a vertically integrated supply of PL leads to lower prices for end consumers.

Bonuses versus commissions: A field study

Quota-based bonuses and commissions are the two most common incentive compensation plans. The authors uncover differential effects of these plans from a natural field-based experiment featuring 14,000 monthly observations over three years from 458 sales territories of a pharmaceutical firm that switched from a bonus plan to an equivalent commission plan. The intervention led to significant sales productivity improvement; this effect was heterogeneous across ability deciles, with much larger increases occurring at lower ability deciles. The authors find significant differences across these plans on (1) effort against nonincentivized tasks and (2) output fluctuations induced through “timing games.” At this firm, the bonus plan was strictly inferior to the implemented commission plan with respect to short-term revenues and timing games. In contrast, the commission plan induced greater neglect of nonincentivized tasks (tasks not directly affecting observable output). To organize their findings, the authors build a simple theoretical model in the personnel economics tradition. The novel result that multitasking concerns are reduced under bonus plans when the quota has been met provides a nuanced rationale for the widespread existence of lump-sum bonus plans.

Assessing the Consequences of a Channel Switch

Switching marketing channels is an expensive and sticky decision. While a number of theories suggest efficiency and strategic differences between channels, there is virtually no work on combining these ideas into an empirically workable methodology to assess the impact of a channel switch. In this study, we undertake to close this gap with an empirical study of the sports drink market, featuring competing producers and heterogeneous channels. We estimate demand and cost parameters for a number of alternative models of competitive interaction and use these estimates to study the switching of Gatorade from its extant (independent wholesaler) channel to the direct store delivery (DSD) channel belonging to Pepsi. Our initial results indicate the following: Pepsi should switch Gatorade to the DSD channel only if (i) the switch decreases Gatorades manufacturing cost by at least 14%, or (ii) the switch increases the share of profit it can obtain by at least 13%, or (iii) the switch enhances demand by the equivalent of a price cut of 4.96¢ for a 32-ounces package. Absent these increases, Pepsi should not switch. Our methodology and results speak to both managers contemplating a channel switch and antitrust authorities faced with the task of evaluating the consequences of a change in vertical structure.

Examining Demand Elasticities in Hanemann's Framework: A Theoretical and Empirical Analysis

This paper examines demand elasticities using an integrated framework proposed by Hanemann [Hanemann, M. W. 1984. Discrete/continuous models of consumer demand. Econometrica52(3) 541--561], which models the incidence, brand choice, and quantity decisions of a consumer as an outcome of her utility maximization subject to budget constraints. Although the Hanemann framework has been the mainstay of earlier efforts to examine these decisions jointly, empirical researchers who have used the it to study purchase behavior have often found that the quantity elasticities are around -1, regardless of the brand or category. We attempt to uncover the underlying reasons for this finding and propose approaches to get as close to the “true” quantity elasticities as possible. We do this by (i) analytically demonstrating how assumptions on the distribution of the brand-specific econometricians errors imply certain restrictions that in turn force quantity elasticities to -1, (ii) discussing how these restrictions can be alleviated by considering a suitable specification of unobserved parameter heterogeneity, and (iii) using scanner data to empirically illustrate the impact of the restrictions on quantity elasticities and the relative efficacy of multiple specifications of unobserved heterogeneity in easing those restrictions. We find that the specification of unobserved heterogeneity crucially influences estimates of quantity elasticities and that the mixture normal specification outperforms the alternatives.

Is Cash King for Sales Compensation Plans? Evidence from a Large-Scale Field Intervention

The pervasive use of merchandise (i.e., noncash) incentives in sales compensation plans is an empirical and theoretical puzzle given the supposed superiority of cash incentives in the standard theory (i.e., principal–agent models) as well as the scant, and contradictory empirical evidence. The authors conducted a large-scale field intervention that switched 580 salespeople at a large frozen food manufacturer away from their cash plus “merchandise points” bonus to a commensurate all-cash bonus. After controlling for salesperson, seasonality, year, and target effects, the authors estimate that sales, on average, dropped by 4.36%. Furthermore, they estimated individual-level sales changes and effort changes to validate the incentive–effort–sales causal chain. The results show that the top salespeople experienced the largest drops in sales. A post-intervention survey of social and individual difference variables reveals that salespeople from households with more discretionary financial resources and those who think more abstractly about the uses of cash income exhibited smaller reductions in effort and sales. Although the absence of a control group prevents the authors from making strong causal inferences, this set of results nevertheless provides descriptive and suggestive evidence for separate mental accounts as the most promising explanation for the greater utility provided by merchandise incentives.