In an innovation contest, a firm (the seeker) facing an innovation-related problem (e.g., a technical R&D problem) posts this problem to a population of independent agents (the solvers) and then provides an award to the agent that generated the best solution.In this paper, we analyze the interaction between a seeker and a set of solvers. Prior research in economics suggests that having many solvers work on an innovation problem will lead to a lower equilibrium effort for each solver, which is undesirable from the perspective of the seeker. In contrast, we establish that the seeker can benefit from a larger solver population because he obtains a more diverse set of solutions, which mitigates and sometimes outweighs the effect of the solvers' underinvestment in effort. We demonstrate that the inefficiency of the innovation contest resulting from the solvers' underinvestment can further be reduced by changing the award structure from a fixed-price award to a performance-contingent award. Finally, we compare the quality of the solutions and seeker profits with the case of an internal innovation process. This allows us to predict which types of products and which cost structures will be the most likely to benefit from the contest approach to innovation. AbstractIn an innovation contest, a rm (the seeker) facing an innovation related problem (e.g. a technical R&D problem) posts this problem to a population of independent agents (the solvers) and then provides an award to the agent that generated the best solution.In this paper, we analyze the interaction between a seeker and a set of solvers. Prior research in Economics suggests that having many solvers work on an innovation problem will lead to a lower equilibrium e ort for each solver, which is undesirable from the perspective of the seeker. In contrast, we establish that the seeker can benet from a larger solver population as he obtains a more diverse set of solutions, which mitigates and sometimes outweighs the e ect of the solvers' underinvestment in e ort. We demonstrate that the ine ciency of the innovation contest resulting from the solvers' under-investment can further be reduced by changing the award structure from a xed price award to a performance contingent award.Finally, we compare the quality of the solutions and seeker prots with the case of an internal innovation process. This allows us to predict which types of products and which cost structures will be the most likely to benet from the contest approach to innovation.

Consumers often know what kind of product they wish to purchase, but do not know which specific variant best fits their needs. As a result, a consumer may find an acceptable product in one retailer but nevertheless purchase nothing, opting to search other retailers for an even better product. We study several models of retail assortment planning, some of which explicitly account for consumer search and one that does not, which we call the "no-search" model. Even though the no-search model never includes an unprofitable variant in the assortment, in the presence of consumer search, it may indeed be optimal to include an unprofitable variant. Furthermore, we find that the no-search model can lead to an assortment with an expected total profit that is significantly less than optimal. In the extreme, the no-search model may recommend closing down a category (i.e., carry no variants) even if a profitable assortment exists (a 100% profit loss). We conclude that failing to incorporate consumer search into an assortment planning process may cause a retailer to underestimate the substantial value a broad assortment has in preventing consumer search. We discuss how the insights from our stylized models may apply to actual assortment planning processes. AbstractConsumers often know what kind of product they wish to purchase, but do not know which speci…c variant best …ts their needs, so consumers shop around. As a result, a consumer may …nd an acceptable product in one store but nevertheless purchase nothing, opting to continue searching for an even better product. We study three versions of the retail assortment problem: a traditional, no-search, version that does not explicitly consider consumer search and two versions that implement two di¤erent consumer search models. In each of the three versions we use the multinomial logit to model consumer choice. Our analysis suggests the retailer's decision to add a product to an assortment should not only consider the direct costs and revenues of the product, but also anticipate the indirect bene…t an extended assortment has in preventing consumer search. For example, we show it may even be optimal to add an unpro…table product to an assortment so as to prevent consumer search. We also test whether the no-search version of assortment planning could perform well in practice. In particular, we presume a retailer implements no-search assortment planning with the following iteration: an assortment is chosen, sales data are collected, a consumer choice model is …tted to the data, a new assortment is chosen, etc. We show that this iteration can lead to a heuristic equilibrium: there exists an assortment that is optimal given the previously observed sales data and the sales data observed with that assortment recommends the same assortment. We demonstrate that the heuristic equilibrium assortment is never deeper than optimal and often contains fewer variants than optimal. The pro…t loss from the heuristic equilibrium assortment can be substantial: in some extreme cases the no-s...

This paper studies a model in which consumers search among multiple competing firms for products that match their preferences at a reasonable price. We focus on how easier search, possibly due to the adoption of search-facilitating technologies such as the Internet, influences equilibrium prices, assortments, firm profits, and consumer welfare. Conventional wisdom suggests that easier search creates a competition-intensifying effect that puts pressure on firms to lower their prices and reduce assortments. However, in our model we demonstrate that search also exhibits a market-expansion effect that encourages firms to expand their assortment-easier search means that each firm is searched by more consumers. Because of broader assortments, consumers are more likely to find products that better match their ideal preferences, improving the efficiency of the market. In fact, we demonstrate that the market-expansion effect can even dominate the competition-intensifying effect potentially leading to higher prices, broader assortments, more profits, and expanded welfare. KeywordsInternet, price competition, assortment, product variety, long-tail phenomenon, game theory, differentiated competition Disciplines Marketing | Other Computer Sciences | Other Education AbstractIf searching for a better price becomes easier for consumers, conventional wisdom suggests that pricing pressure will increase on firms, thereby lowering prices, reducing firm profits and narrowing assortments. There is indeed evidence that recent search facilitating technologies, such as the Internet, have in some markets reduced prices. But there is also evidence that firms have been able to maintain some pricing power. Furthermore, there is evidence that the Internet has expanded variety in some markets and this broadening of the available assortment has increased consumer welfare significantly. This paper studies a model in which firms compete on price and assortment and consumers search for products that match their preferences at a reasonable price. Easier search does exhibit a competition intensifying effect in our model, and this effect puts pressure on firms to lower their prices and reduce assortments. But we also show that easier search exhibits a market expansion effect that encourages firms to expand their assortment. Due to broader assortments, consumers are more likely to find products that match their ideal preferences, improving the efficiency of the market. In fact, we demonstrate that the market expansion effect can even dominate the competition intensifying effect potentially leading to higher prices, broader assortments, more profits and expanded welfare.

Production ramp-up is the period of time during which a manufacturing process is scaled up from a small laboratory-like environment to high-volume production. During this scale-up, the firm needs to overcome the numerous discrepancies between how the process is specified to operate as written in the process recipe and how it actually is operated at large volume. The reduction of these discrepancies, a process that we will refer to as learning, will lead to improved production yields and higher output. In addition to its learning effort, however, the firm also attempts to change the process recipe itself, which can be in direct conflict with the learning objective. We formalize this intertemporal tradeoff between learning and process change in the form of a dynamic optimization problem. Our model explains the idea of a "copy-exactly" ramp-up, which freezes the process for some time period, i.e., does not allow for any change in the process. Mathematically, this corresponds to a process improvement policy which delays process changes, thereby exhibiting a nonmonotone trajectory, which we show to be optimal if the initial knowledge level is low, the lifecycle short and demand growth is steep, and learning is difficult. Disciplines MathematicsThis journal article is available at ScholarlyCommons: http://repository.upenn.edu/oid_papers/227The Copy Exactly Ramp-up Strategy: Trading-off Learning with Process Change Christian Terwiesch and Yi Xu August 4, 2003Abstract Production ramp-up is the period of time during which a manufacturing process is scaled up from a small laboratory-like environment to high volume production.During this scale-up, the firm needs to overcome the numerous discrepancies between how the process is specified to operate as written in the process recipe and how it actually is operated at large volume. The reduction of these discrepancies, a process that we will refer to as learning, will lead to improved production yields and higher output. In addition to its learning effort, however, the firm also attempts to change the process recipe itself, which can be in direct conflict with the learning objective. We formalize this inter-temporal trade-off between learning and process change in form of a dynamic optimization problem. Our model explains the idea of a "copy-exactly" ramp-up, which freezes the process for some time period, i.e.does not allow for any change in the process. Mathematically, this corresponds to a process improvement policy which delays process changes, thereby exhibiting a non-monotone trajectory, which we show to be optimal if the initial knowledge level is low, the lifecycle short and demand growth is steep, and learning is difficult.

This paper studies assortment planning and pricing for a product category with heterogeneous product types from two brands. We model consumer choice using the nested multinomial logit framework with two different hierarchical structures: a brand-primary model in which consumers choose a brand first, then a product type in the chosen brand, and a type-primary model in which consumers choose a product type first, then a brand within that product type. We consider a centralized regime that finds the optimal solution for the whole category and a decentralized regime that finds a competitive equilibrium between two brands. We find that optimal and competitive assortments and prices have quite distinctive properties across different models. Specifically, with the brand-primary model, both the optimal and the competitive assortments for each brand consist of the most popular product types from the brand. With the type-primary choice model, the optimal and the competitive assortments for each brand may not always consist of the most popular product types of the brand. Instead, the overall assortment in the category consists of a set of most popular product types. The price of a product under the centralized regime can be characterized by a sum of a markup that is constant across all products and brands, its procurement cost, and its marginal operational cost, implying a lower price for more popular products. The markup may be different for each brand and product type under the decentralized regime, implying a higher price for brands with a larger market share. These properties of the assortments and prices can be used as effective guidelines for managers to identify and price the best assortments and to rule out nonoptimal assortments. Our results suggest that to offer the right set of products and prices, category and/or brand managers should create an assortment planning process that is aligned with the hierarchical choice process consumers commonly follow to make purchasing decisions. This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors. This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors.assortment planning, product variety, category management, pricing, inventory costs, nested multinomial logit model

This paper investigates the impact of royalty revision on incentives and profits in a twostage (R&D stage and marketing stage) alliance with a marketer and an innovator. The marketer offers royalty contracts to the innovator. We find the potential for royalty revision leads to more severe distortions in the optimal initial royalty contracts offered by the marketer. We show if the innovator plays a significant role in the marketing stage, the marketer should offer a low royalty rate initially and then revise the royalty rate up later. Otherwise, she should do the opposite. We identify two major effects of royalty revision. First, royalty revision provides the marketer with a flexibility to dynamically adjust royalty rates across the two stages of the alliance to better align the innovator's incentives. This incentive realigning effect improves the marketer's profit. Second, royalty revision makes it harder for the marketer to obtain private information from the innovator because the innovator worries the marketer will take advantage of the information to revise the initial contract to a more favorable one to herself later. This information revealing effect hurts the marketer's profit. We characterize in what kind of alliances marketers would benefit the most from royalty revision so that managers should clearly establish the expectation for royalty revision, and in what kind of alliances markerters would not benefit from royalty revision so that managers should commit not to revise the initial royalty contract. With royalty contracts that are contingent on the R&D outcome of the R&D stage, we find that contingent contract structure could be either substitutable (by fully capturing the incentive realigning effect) or complementary (by weakening the information revealing effect) to royalty revision depending on whether the innovator plays a significant role of the marketing stage. Managers may need to use contingent contract (if possible) either to replace or with royalty revision accordingly to improve profits.

O utsourcing stretches supply chains longer with added contract manufacturers responsible for the manufacturing of parts and final products. Should a firm change its quality management approach as its supply chain becomes longer with outsourced manufacturing? This paper studies a brand owner's optimal choice between two commonly used quality management approaches: an inspection-based approach and an external failure-based approach, in two supply chainsa dyadic supply chain and a multi-level supply chain where the brand owner outsources manufacturing to an independent contract manufacturer. Our study finds that the brand owner's optimal choice between the two quality management approaches could be opposite in the two supply chains. Specifically, we show that if agency costs exist between the contract manufacturer and the brand owner, the brand owner may prefer an inspection-based approach in the multi-level supply chain in contrast to preferring an external failure-based approach in the dyadic supply chain. In particular, inspections can be effective for the brand owner to limit the manufacturer's profit by excluding defective finished products and components, which in turn reduce agency costs in the multi-level supply chain. Hence, the efficiency of an inspectionbased approach relative to an external failure-based approach can be higher in the multi-level supply chain as compared to the dyadic one. Our findings suggest that firms should adjust to changes in supply chain structures and re-evaluate the efficiencies of different quality management approaches accordingly.

Although the development of the high-tech industry is part of the national agenda of many countries, particularly transition economies, few studies have analysed innovation efficiency in countries with environments unfavourable to high-tech industry development. This study explores the relationships of government grants, private R&D funding and innovation efficiencies of the high-tech industry in China. We use a stochastic frontier analysis model to study the roles of government and market mechanisms in high-tech industry innovation from 1995 to 2008. Findings show that government grants do not crowd out private funding, but stimulate private R&D expenditure. Private R&D funding has positively influenced innovation in the Chinese high-tech industry, and efficiency potentials are widely under-exploited. Additionally, government grants are observed to negatively impact innovation by large firms in the Chinese high-tech industry. Furthermore, we reveal that human capital can promote the innovation performance of high-tech firms, excepting those of medium scale. The findings provide insightful perspectives on China's high-tech industry.