V. Padmanabhan

The bullwhip effect in supply chains

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Warranties, extended warranties, and product quality

Abstract We analyze the effect of extended warranties on a manufacturers warranty policy under conditions of producer moral hazard. When all consumers in the market are identical, the manufacturer offers a full warranty. If consumers differ in their valuations of a working unit, then the manufacturer may offer partial warranties (and low quality) to low valuation consumers, and full warranties (and high quality) to high valuation consumers. The availability of extended warranties from an independent insurer has an important effect on this menu of warranty/quality choices. If such an insurer enters the market, the manufacturer may increase or decrease the warranty, price, and quality that it offers low valuation consumers. The result can be an increase in the manufacturers profits.

Research Note---A Cross-Category Model of Households' Incidence and Quantity Decisions

This paper advances the literature on multicategory demand models by simultaneously handling more than one purchase decision of the household. We propose a two-stage bivariate logit model of incidence and quantity outcomes in multiple categories. Our results show that cross-category promotional spillovers are asymmetric between the two product categories of bacon and eggs. The total retail profit responds more to bacon price than to egg price. Promoting bacon is found to have a bigger impact on egg profit than the impact of egg promotion on bacon profit. We decompose (1) the total retail profits, as well as (2) the cross-category profit impact of a price promotion, into its two components, and find that (1) 23% (67%) of the total retail profit impact of a promotion on bacon (eggs) arises on account of quantity effects, and (2) 40% (33%) of the increase in egg (bacon) profit from promoting bacon (eggs) is on account of quantity effects.

Price Competition Under Stockpiling and Flexible Consumption

Conventional wisdom suggests that the main effect of price promotion is on brand switching (i.e., secondary demand); however, some recent studies demonstrate that the primary demand expansion effect can be considerably larger than previously believed. A significant driver of this primary demand effect is consumer stockpiling in response to price promotions. Indeed, experimental studies have shown that additional inventory on hand can lead to an endogenous increase in consumption. The authors develop a model of price competition between firms in response to the stockpiling and subsequent consumption dynamics of consumers. In this setting, the flexible consumption effect causes more intense price competition, deeper promotions, and an increase in the frequency of promotions. The authors use two years of scanner panel data from eight product categories and 4313 stockkeeping units to test three implications of the theoretical model; they find strong support for each.

Optimal pricing of successive generations of product advances

Abstract We obtain the optimal pricing policy of a monopolist marketing successive generations of product advances. We characterize the impact of foresight regarding entry of the second generation product and the technological substitution and market expansion created by the introduction of the second generation product on the optimalpricing policy of the monopolist. We also obtain the optimal pricing policies of the producers in situations where the successive generations of product advances are marketed by independent producers. By contrasting these policies with those of the monopolist marketing successive generations of product advances, we provide insight on the differential impact of foresight, technological substitution and market expansion on the optimal pricing policies of the producers.

An econometric model of location and pricing in the gasoline market

The authors propose an econometric model of both the geographic locations of gasoline retailers in Singapore and price competition among retailers conditional on their geographic locations. Although market demand for gasoline is not observed, the authors are able to infer the effects of such demand from stations’ locations and pricing decisions using available data on local market-level demographics. Using the proposed location model, which is based on the assumption of social welfare maximization by a policy planner, the authors find that local potential gasoline demand depends positively on the local demographic characteristics of the neighborhood. Using the proposed pricing model, which is based on the assumption of Bertrand competition between retail chains, the authors find that retail margins for gasoline are approximately 21%. The authors also find that consumers are willing to travel up to a mile for a savings of

Crisis and Consumption Smoothing

.03 per liter. Using the estimates of the proposed econometric model, the authors answer policy questions pertaining to a recent merger between two firms in the industry. Answering these questions has important policy implications for both gasoline firms and policy makers in Singapore.

Contractual Relationships and Coordination in Distribution Channels

The dramatic impact of the current crisis on performance of businesses across sectors and economies has been headlining the business press for the past several months. Extant reconciliations of these patterns in the popular press rely on ad hoc reasoning. Using historical data on currency crisis episodes across the world, we show that the impact of the crisis on a firms business is best understood by focusing on the impact of the crisis on the behavior of consumers. Our analyses show that consumer behavior in a crisis is characterized by consumption smoothing at various levels---intertemporal, intercategory, and intracategory. These behavioral adjustments result in significant reallocation of consumption expenditures. More importantly, the smoothing decisions because of a crisis are distinct and independent of the impact of changes in income and prices that accompany a crisis. Interestingly, there is marked variation in the patterns of consumption smoothing across different types of economies. Taken together, these results have important and interesting implications for managers, policy makers, and academics.

Information distortion in a supply chain: the bullwhip effect

Marketing Channels refer to the set of interdependent organizations involved in taking a product or service from its point of production to its point of consumption. Channels are increasingly being viewed as a key strategic asset because of their ability to create a sustainable competitive advantage relative to competition. This chapter reviews the growing literature in marketing, operations and industrial organization that deals with the role of contracts and other institutional arrangements in channel organization and management. The focus is on understanding the implications of strategic interactions among institutions in a distribution channel and the efficiency of different contractual mechanisms. The chapter closes with suggestions for future research in this domain.