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What makes a decision strategic? When is strategy most important? This paper formally studies these questions, starting from a (functional) definition of strategy as the smallest set of choices to optimally guide (or force) other choices. The paper shows that this definition coincides with the equilibrium outcome of a 'strategy formulation game,' in which such strategy endogenously creates a hierarchy among decisions. With respect to what makes a decision strategic and what makes strategy valuable, the paper considers the effect of commitment, reliability, and irreversibility of a decision; the presence of uncertainty (and the type of uncertainty); the number and strength of its interactions and the centrality of a decision; its level and importance; the development of capabilities; and competition. This paper was accepted by Bruno Cassiman, business strategy. [ABSTRACT FROM AUTHOR]

Reputation feedback systems assign feedback scores to traders with the aim of separating them according to reliability. There is now a substantial amount of literature on what these mechanisms do well and not so well. Conspicuously absent is a theoretical framework to guide thinking on improving these systems. Here we construct a prototype market, stylized and conceptual in nature, but also suitable for laboratory testing. We use the prototype to examine competing approaches to eliciting feedback from traders. Using entropy to benchmark informativeness, we show that the informativeness of feedback elicitation approaches depends on the ability to solve a coordination problem such that traders use a common mapping to turn experiences into ratings. In theory, different approaches can be about equally informative although the map to coordinate on is more ambiguous in some cases. We then test the approaches in the laboratory. The resulting data find that the most informative feedback is associated with the elicitation methods where the solution to the coordination problem is least ambiguous. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Funding: Financial support from the Deutsche Forschungsgemeinschaft (German Research Foundation) through the Research Unit "Design & Behavior" [FOR 1371] is gratefully acknowledged. The authors thank the Dutch national e-infrastructure for support of the SURF Cooperative. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2023.4694. [ABSTRACT FROM AUTHOR]

The sunk cost effect has been widely observed in individual decisions. Building on an intrapersonal self-management game, the paper theoretically shows that the sunk cost effect may stem from an attempt to overcome the underinvestment problem associated with a high degree of present bias or to resolve the multi-selves coordination problem when the degree of present bias is low. Especially for individuals with severe present bias, the current self may take a costly action (which is a sunk cost for the future self) to signal the individual's high success probability that motivates his future self-disciplining behaviors. In equilibrium, a higher level of sunk cost is more likely to give rise to a higher probability for the individual to continue the project. We then conduct a laboratory experiment. The empirical findings are consistent with our theoretical implications. The online appendix is available at https://doi.org/10.1287/mnsc.2018.3032. This paper was accepted by Juanjuan Zhang, marketing. [ABSTRACT FROM AUTHOR]

This paper studies the effect of competition on opacity in the financial system. In my model, two financial institutions competing for investors simultaneously make a public disclosure decision when both are exposed to rollover risk. I find that in the face of rollover risk, competition between financial institutions has a nonmonotonic effect on their disclosure decisions. More intense competition can reduce disclosure and make the financial system more opaque, especially when investors' private information about the financial institutions is sufficiently precise. This paper was accepted by Suraj Srinivasan, accounting. [ABSTRACT FROM AUTHOR]

This paper addresses volunteer labor markets where the lack of price signals, nonpecuniary motivations to supply labor, and limited fungibility of supply lead to market failure. To address the causes of the market failure, we conduct a field experiment with volunteer whole blood donors where we introduce a market-clearing mechanism (henceforth: the Registry). Our intention-to-treat estimates suggest that subjects invited to the Registry, regardless of joining, are 66% more responsive to critical shortage appeals than control subjects. While the Registry increases supply during a critical shortage episode, it does not increase supply when there is no shortage; thus, the Registry significantly improves coordination between volunteer donors and collection centers, thereby improving market outcomes. We find evidence that the Registry's effectiveness stems from crowding-in volunteers with purely altruistic motives and volunteers with a preference for commitment. This paper was accepted by Yan Chen, decision analysis. [ABSTRACT FROM AUTHOR]

Consider a supply chain consisting of two independent agents, a supplier (e.g., a manufacturer) and its customer (e.g., a retailer), the latter in turn serving an uncertain market demand. To reconcile manufacturing/procurement time lags with a need for timely response to the market, such supply chains often must commit resources to production quantities based on forecasted rather than realized demand.The customer typically provides a planning forecast of its intended purchase, which does not entail commitment. Benefiting from overproduction while not bearing the immediate costs, the customer has incentive to initially overforecast before eventually purchasing a lesser quantity. The supplier must in turn anticipate such behavior in its production quantity decision. This individually rational behavior results in an inefficient supply chain.This paper models the incentives of the two parties, identifying causes of inefficiency and suggesting remedies. Particular attention is given to the Quantity Flexibility (QF) contract, which couples the customer's commitment to purchase no less than a certain percentage below the forecast with the supplier's guarantee to deliver up to a certain percentage above. Under certain conditions, this method can allocate the costs of market demand uncertainty so as to lead the individually motivated supplier and customer to the systemwide optimal outcome. We characterize the implications of QF contracts for the behavior and performance of both parties, and the supply chain as a whole. [ABSTRACT FROM AUTHOR]

This paper describes a simple set of coordination structures that model certain kinds of information processing involved in organizations and markets. Four generic coordination structures are defined: product hierarchies, functional hierarchies, centralized markets, and decentralized markets. Then tradeoffs among these structures are analyzed in terms of production costs, coordination costs, and vulnerability costs. This model is unusual in that it includes detailed definitions of the structures at a micro-level and mathematical derivations of comparisons among them at a macro-level. In the final section of the paper, several connections are made between these formal results and previous work on organizational design. [ABSTRACT FROM AUTHOR]

This paper investigates the mechanism through which short selling of a bank's stocks can trigger the failure of the bank. In the model, creditors, who learn information from stock prices, will grow increasingly unsure about the bank's true fundamentals in facing noisier stock prices; thus a run on the bank is more likely because of creditors' concave payoff. Understanding this, speculators conduct short selling beforehand to amplify (il)liquidity and add noise to stock prices, triggering a bank run, and subsequently profit from the bank's failure. We show that short-selling attacks on a bank involve two runs: the aggressive run among speculators and the conservative run among creditors. These two runs interact and reinforce each other, with compound feedback loops that drastically increase the probability of the collapse of the bank. We discuss policy implications of the model. [ABSTRACT FROM AUTHOR]

We examine the teams that emerge when a primary care physician (PCP) refers patients to specialists. When PCPs concentrate their specialist referrals—for instance, by sending their cardiology patients to fewer distinct cardiologists—repeat interactions between PCPs and specialists are encouraged. Repeated interactions provide more opportunities and incentives to develop productive team relationships. Using data from the Massachusetts All Payer Claims Database, we construct a new measure of PCP team referral concentration and document that it varies widely across PCPs, even among PCPs in the same organization. Chronically ill patients treated by PCPs with a one standard deviation higher team referral concentration have 4% lower healthcare utilization on average, with no discernible reduction in quality. We corroborate this finding using a national sample of Medicare claims and show that it holds under various identification strategies that account for observed and unobserved patient and physician characteristics. The results suggest that repeated PCP-specialist interactions improve team performance. This paper was accepted by Carri Chan, healthcare management. [ABSTRACT FROM AUTHOR]

This research studies a resource pool-choice dilemma, in which a group of resource seekers independently choose between a larger pool containing more resources and a smaller pool containing fewer resources, knowing that the resources in each pool will be divided equally among its choosers, so that the more (fewer) people choose a certain pool, the fewer (more) resources each of them will get. This setting corresponds to many real-world situations, ranging from students choosing majors as a function of job opportunities to entrepreneurs choosing markets as a function of customer bases. Ten studies reveal a systematic undershooting bias: fewer people choose the larger pool relative to both the normative equilibrium benchmark and chance (random choice), thus advantaging those who choose the larger pool and disadvantaging those who choose the smaller pool. We present evidence showing that the undershooting bias is driven by bounded rationality in strategic thinking and discuss the relationship between our paradigm and other coordination games. This paper was accepted by Yuval Rottenstreich, decision analysis. [ABSTRACT FROM AUTHOR]

The mobility of individual managers has long presented a problem for firms in knowledge-intensive industries. Shifting to more complex work often reduces the importance of a single individual's knowledge for the firm's exchange relationships because complex work requires inputs from a broader set of the firm's members. Although complex work decreases the likelihood that a single individual can shift the exchange relationship to another firm, we propose that it increases the vulnerability of the firm's performance to departures of those individual managers who act as coordinators of knowledge. This leads us to focus on how the internal knowledge network formed to maintain each relationship can compound or mitigate the loss of a coordinating manager. Using original data on client relationships from a law firm, we examine the effect of internal knowledge networks and lead partner departures on the performance of the relationships. Supporting our argument, we find that the negative performance effect of a lead partner departure is greater when the network has high knowledge heterogeneity and involves more experts and lower when the network has high cohesion. This paper was accepted by Jesper Sørensen, organizations. [ABSTRACT FROM AUTHOR]

This study investigates a potential mechanism to promote coordination. With theoretical guidance using a belief-based learning model, we conduct a multiperiod, binary-choice, and weakest-link laboratory coordination experiment to study the effect of gradualism—increasing the required levels (stakes) of contributions slowly over time rather than requiring a high level of contribution immediately—on group coordination performance. We randomly assign subjects to three treatments: starting and continuing at a high stake, starting at a low stake but jumping to a high stake after a few periods, and starting at a low stake while gradually increasing the stakes over time (the Gradualism treatment). We find that relative to the other two treatments, groups coordinate most successfully at high stakes in the Gradualism treatment. We also find evidence that supports the belief-based learning model. These findings point to a simple mechanism for promoting successful voluntary coordination. This paper was accepted by Axel Ockenfels, behavioral analysis. [ABSTRACT FROM AUTHOR]

To remedy challenges resulting from a high number of objectives in multiobjective programming and multicriteria decision making, this paper chooses to decompose the vector objective function and characterizes the relationships between solutions for the original problem and the collection of decomposed subproblems. In particular, it is shown how solutions that are found using this decomposition approach relate to solutions found by traditional scalarization techniques. For the selection of a final solution, two interactive coordination methods are proposed that allow to find any solution for the original problem by merely solving the smaller-sized subproblems, while integrating both preferences of the decision maker and trade-off information obtained from a sensitivity analysis. A theoretical foundation for the procedures is established, and their application is illustrated for portfolio optimization and a design selection problem. [ABSTRACT FROM AUTHOR]

In this paper, we study competition in multiechelon supply chains with an assembly structure. Firms in the supply chain are grouped into homogenous sectors (nodes) that contain identical firms with identical production capabilities that all produce exactly one undifferentiated product (that may itself be a "kit" of components). Each sector may use several inputs to produce its product, and these inputs are supplied by different sectors. The production process within any sector is taken to be pure assembly in fixed proportions. The number of firms in each sector is known. The demand curve for the final product is assumed to be linear, as are production costs in all sectors. Competition is modeled via a "coordinated successive Cournot" model in which firms choose production quantities for their downstream market so as to maximize profits, given prices for all inputs and all complementary products. Production quantities for sectors supplying the same successor are coordinated through pricing mechanisms, so that complementary products are produced in the right proportions. Under these assumptions, equilibrium prices for any multiechelon assembly network are characterized by a system of linear equations. We derive closed-form expressions for equilibrium quantities and prices in any two-stage system (i.e., a system with multiple input sectors and a single assembly sector). We show that any assembly structure can be converted to an equivalent (larger) structure in which no more than two components are assembled at any node. Finally, large structures can be solved either by direct solution of the characteristic linear equations or through an iterative reduction (compression) to smaller structures. [ABSTRACT FROM AUTHOR]

We address a fundamental two-echelon distribution system in which the sales volumes of the retailers are endogenously determined on the basis of known demand functions. Specifically, this paper studies a distribution channel where a supplier distributes a single product to retailers, who in turn sell the product to consumers. The demand in each retail market arrives continuously at a constant rate that is a general decreasing function of the retail price in the market. We have characterized an optimal strategy, maximizing total systemwide profits in a centralized system. We have also shown that the same optimum level of channelwide profits can be achieved in a decentralized system, but only if coordination is achieved via periodically charged, fixed fees, and a nontraditional discount pricing scheme under which the discount given to a retailer is the sum of three discount components based on the retailer's (i) annual sales volume, (ii) order quantity, and (iii) order frequency, respectively. Moreover, we show that no (traditional) discount scheme, based on order quantities only, suffices to optimize channelwide profits when there are multiple nonidentical retailers. The paper also considers a scenario where the channel members fail to coordinate their decisions and provides numerical examples that illustrate the value of coordination. We extend our results to settings in which the retailers' holding cost rates depend on the wholesale price. [ABSTRACT FROM AUTHOR]

Healthcare reimbursements in the United States have been traditionally based on a fee-for-service (FFS) scheme, providing incentives for high volume of care, rather than efficient care. The new healthcare legislation tests new payment models that remove such incentives, such as the bundled payment (BP) system. We consider a population of patients (beneficiaries). The provider may reject patients based on the patient’s cost profile and selects the treatment intensity based on a risk-averse utility function. Treatment may result in success or failure, where failure means that unforeseen complications require further care. Our interest is in analyzing the effect of different payment schemes on outcomes such as the presence and extent of patient selection, the treatment intensity, the provider’s utility and financial risk, and the total system payoff. Our results confirm that FFS provides incentives for excessive treatment intensity and results in suboptimal system payoff. We show that BP could lead to suboptimal patient selection and treatment levels that may be lower or higher than desirable for the system, with a high level of financial risk for the provider. We also find that the performance of BP is extremely sensitive to the bundled payment value and to the provider’s risk aversion. The performance of both BP and FFS degrades when the provider becomes more risk averse. We design two payment systems, hybrid payment and stop-loss mechanisms, that alleviate the shortcomings of FFS and BP and may induce system optimum decisions in a complementary manner. This paper was accepted by Serguei Netessine, operations management.

In this commentary, we trace back how we pursued research on the bullwhip effect, which resulted in the article published in Management Science. We reflect on the evolution of this concept, the impact that our work has had on industry, the way our work has been used in the teaching of supply chain management, and the key directions of research that have taken place since then. [ABSTRACT FROM AUTHOR]

While every firm in a supply chain bears supply risk (the cost of insufficient supply), some firms may, even with wholesale price contracts, completely avoid inventory risk (the cost of unsold inventory). With a push contract there is a single wholesale price and the retailer, by ordering his entire supply before the selling season, bears all of the supply chain's inventory risk. A pull contract also has a single wholesale price, but the supplier bears the supply chain's inventory risk because only the supplier holds inventory while the retailer replenishes as needed during the season. (Examples include Vendor Managed Inventory with consignment and drop shipping.) An advance-purchase discount has two wholesale prices: a discounted price for inventory purchased before the season, and a regular price for replenishments during the selling season. Advance-purchase discounts allow for intermediate allocations of inventory risk: The retailer bears the risk on inventory ordered before the season while the supplier bears the risk on any production in excess of that amount. This research studies how the allocation of inventory risk (via these three types of wholesale price contracts) impacts supply chain efficiency (the ratio of the supply chain's profit to its maximum profit). It is found that the efficiency of a single wholesale price contract is considerably higher than previously thought as long as firms consider both push and pull contracts. In other words, the literature has exaggerated the value of implementing coordinating contracts (i.e., contracts that achieve 100% efficiency, such as buy-backs or revenue sharing) because coordinating contracts are compared against an inappropriate benchmark (often just a push contract). Furthermore, if firms also consider advance-purchase discounts, which are also simple to administer, then the coordination of the supply chain and the arbitrary allocation of its profit is possible. Several limitations of advance-purchase... [ABSTRACT FROM AUTHOR]

In the supply-chain literature, an increasing body of work studies how suppliers can use incentive schemes such as quantity discounts to influence buyers' ordering behaviour, thus reducing the supplier's (and the total supply chain's) costs. Various functional forms for such incentive schemes have been proposed, but a critical assumption always made is that the supplier has full information about the buyer's cost structure. We derive the optimal quantity discount policy under asymmetric information and compare it to the situation where the supplier has full information. [ABSTRACT FROM AUTHOR]

In this paper we consider a problem of joint coordination between a firm's manufacturing and supply departments. The manufacturing department is responsible for meeting random demand of a product with a short life cycle. The supply department's responsibility is to provide the sufficient amount of raw materials so that the required production level can be achieved. When coordination prevails, both departments' decisions are jointly made; otherwise, decisions are made independently without an exchange of information. If the random demand exceeds the amount produced, a second production run can be expedited at a substantially higher cost. Our analysis yields insightful results to such a coordination problem between the two departments. We provide conditions under which it is desirable to coordinate, resulting in a significant increase in expected profit. If coordination is optimal, then the supply department would purchase additional reserved material for the second run. Under this scenario, we analyze the effects of joint coordination on the expected profit. We also find explicit conditions for which joint coordination is not beneficial, i.e., the supply department should only order sufficient material to meet the first production run requirements. We provide a detailed set of numerical examples and generate response surfaces indicating the desirability of coordination for different pairs of parameter combinations. [ABSTRACT FROM AUTHOR]

The management of coordination gaps is critical to the effective functioning of a customer support team. To address the managerial challenge of designing Information Technology (IT) to facilitate coordination in customer support teams, this paper develops a framework describing the drivers of coordination gaps in customer support teams. Measures for the characteristics of problem resolution processes, the characteristics of IT that assist in the management of coordination gaps, and coordination gaps are developed and validated. Results from a field study administered to 399 respondents from 41 teams in Apple, Dell, Hewlett-Packard, IBM, Seton Hospital, and Southwestern Bell support the proposition that coordination gaps arise from a lack of fit between the characteristics of problem resolution processes used and the characteristics of IT used. What is more important, the results also indicate that processes with differing characteristics require different kinds of IT. [ABSTRACT FROM AUTHOR]

We present experiments studying how high-ability individuals use help to foster efficient coordination. After an initial phase that traps groups in a low-productivity equilibrium, incentives to coordinate are increased, making it possible to escape this performance trap. The design varies whether high-ability individuals can offer help and, if so, whether they must commit to help for an extended period. If help is chosen on a round-by-round basis, the probability of escaping the performance trap is slightly reduced by allowing for help. The likelihood of success significantly improves if high-ability individuals must commit to help for an extended time. We develop and estimate a structural model of sophisticated learning that provides an explanation for why commitment is necessary. The key insight is that potential leaders who are overly optimistic about their ability to teach their followers are too fast to eliminate help in the absence of commitment. [ABSTRACT FROM AUTHOR]

The integration of systems for pricing and revenue management must trade off potential revenue gains against significant practical and technical challenges. This dilemma motivates us to investigate the value of coordinating decisions on prices and capacity allocation in a stylized setting. We propose two pairs of sequential policies for making static decisions—on pricing and revenue management—that differ in their degree of integration (hierarchical versus coordinated) and their pricing inputs (deterministic versus stochastic). For a large class of stochastic, price-dependent demand models, we prove that these four heuristics admit tractable solutions satisfying intuitive sensitivity properties. We further evaluate numerically the performance of these policies relative to a fully coordinated model, which is generally intractable. We find it interesting that near-optimal performance is usually achieved by a simple hierarchical policy that sets prices first, based on a nonnested stochastic model, and then uses these prices to optimize nested capacity allocation. This tractable policy largely outperforms its counterpart based on a deterministic pricing model. Jointly optimizing price and allocation decisions for the high-end segment improves performance, but the largest revenue benefits stem from adjusting prices to account for demand risk. [ABSTRACT FROM AUTHOR]

Organizations engage in search whenever they perform nonroutine tasks, such as the definition and validation of a new strategy, the acquisition of new capabilities, or new product development. Previous work on search and organizational hierarchy has discovered that a hierarchy with a central decision maker at the top can speed up problem solving, but possibly at the cost of solution quality compared with results of a decentralized search. Our study uses a formal model and simulations to explore the effect of an organizational hierarchy on solution stability, solution quality, and search speed. Three insights arise on how a hierarchy can improve organizational search: (1) assigning a lead function that "anchors" a solution speeds up problem solving; (2) local solution choice should be delegated to the lowest level; and (3) structure matters little at the middle management level, but it matters at the front line; front-line groups should be kept small. These results highlight the importance for every organization of adapting its hierarchical structure to its search requirements. [ABSTRACT FROM AUTHOR]

The overuse of its currency processing facilities by depository institutions (DIs) has motivated the Federal Reserve (Fed) to impose its new cash recirculation policy. This overuse is characterized by the practice of cross-shipping, where a DI both deposits and withdraws cash of the same denomination in the same business week in the same geographical area. Under the new policy, which came into effect July 2007, the Fed has imposed a recirculation fee on cross-shipped cash. The Fed intends to use this fee to induce DIs to effectively recirculate cash so that the societal cost of providing cash to the public is lowered. To examine the efficacy of this mechanism, we first characterize the social optimum and then analyze the response of DIs under a recirculation fee levied on cross-shipped cash. We show that neither a linear recirculation fee, which is the Fed's current practice, nor a more sophisticated nonlinear fee is sufficient to guarantee a socially optimal response from DIs. We then derive a fundamentally different mechanism that induces DIs to self-select the social optimum. Our mechanism incorporates a fairness adjustment that avoids penalizing DIs that recirculate their fair share of cash and rewards DIs that recirculate more than this amount. We demonstrate that the mechanism is easy to implement and tolerates a reasonable amount of imprecision in the problem parameters. We also discuss a concept of welfare-preserving redistribution wherein the Fed allows a group of DIs to reallocate (amongst themselves) their deposits and demand if such a possibility does not increase societal cost. Finally, we analyze the impact of incorporating the custodial inventory program, another component of the Fed's new policy. [ABSTRACT FROM AUTHOR]

We examine the problem of developing supply contracts that encourage proper coordination of forecast information and production decisions between a manufacturer and distributor of high fashion, seasonal products operating in a two-mode production environment. The first production mode is relatively cheap but requires a long lead time while the second is expensive but offers quick turnaround. We focus on contracts of the form (w1, w2, b) where wi is the wholesale price offered for production mode i and b is a return price offered for items left over at the end of the season. We find that such a contract can coordinate the manufacturer and distributor to act in the best interest of the channel. The pricing conditions needed to ensure an efficient solution vary depending on the degree of demand forecast improvement between periods and the manufacturer's access to forecast information. We also examine whether these conditions ensure a Pareto optimal solution with respect to two traditional production settings. [ABSTRACT FROM AUTHOR]