Showing papers by "Fuqiang Zhang published in 2009"

On the Value of Commitment and Availability Guarantees When Selling to Strategic Consumers

Abstract: This paper studies the role of product availability in attracting consumer demand. We start with a newsvendor model, but additionally assume that stockouts are costly to consumers. The seller sets an observable price and an unobservable stocking quantity. Consumers anticipate the likelihood of stockouts and determine whether to visit the seller. We characterize the rational expectations equilibrium in this game. We propose two strategies that the seller can use to improve profits: (i) commitment (i.e., the seller, ex ante, commits to a particular quantity) and (ii) availability guarantees (i.e., the seller promises to compensate consumers, ex post, if the product is out of stock). Interestingly, the seller has an incentive to overcompensate consumers during stockouts, relative to the first-best benchmark under which social welfare is maximized. We find that first-best outcomes do not arise in equilibrium, but can be supported when the seller uses a combination of commitment and availability guarantees. Finally, we examine the robustness of these conclusions by extending our analysis to incorporate dynamic learning, multiple products, and consumer heterogeneity.

Dynamic Capacity Management with Substitution

Abstract: We examine a multiperiod capacity allocation model with upgrading. There are multiple product types, corresponding to multiple classes of demand, and the firm purchases capacity of each product before the first period. Within each period, after demand arrives, products are allocated to customers. Customers who arrive to find that their product has been depleted can be upgraded by at most one level. We show that the optimal allocation policy is a simple two-step algorithm: First, use any available capacity to satisfy same-class demand, and then upgrade customers until capacity reaches a protection limit, so that in the second step the higher-level capacity is rationed. We show that these results hold both when all capacity is salvaged at the end of the last demand period as well as when capacity can be replenished (in the latter case, an order-up-to policy is optimal for replenishment). Although finding the optimal protection limits is computationally intensive, we describe bounds for the optimal protection limits that take little effort to compute and can be used to effectively solve large problems. Using these heuristics, we examine numerically the relative value of strictly optimal capacity and dynamic rationing, the value of perfect demand information, and the impact of demand and economic parameters on the value of optimal substitution.

Strategic Customer Behavior and the Benefit of Decentralization

Abstract: In the operations management literature, decentralization is often associated with the double marginalization problem. However, in this chapter, we review several existing papers that demonstrate how decentralization can be beneficial to supply chain performance. A key premise in this literature is that consumers are strategic: They rationally anticipate and respond to future market conditions. We consider two broad classes of products, durable goods and perishable goods. In both cases, when facing strategic consumers, firms are typically better off if they can commit to future actions. When operating in a decentralized supply chain, contractual mechanisms can help firms achieve commitment power and increase profits. In this way, decentralized systems can outperform a centralized organization.