Tài liệu Supply chain management in the presence of strategic consumers and consumption externalities

NORTHWESTERN UNIVERSITY SUPPLY CHAIN MANAGEMENT IN THE PRESENCE OF STRATEGIC CONSUMERS AND CONSUMPTION EXTERNALITIES A DISSERTATION SUBMITTED TO THE GRADUATE SCHOOL IN PARTIAL FULFILLMENT OF THE REQUIREMENTS for the degree DOCTOR OF PHILOSOPHY Field of Industrial Engineering and Management Sciences By KENAN ARİFOĞLU EVANSTON, ILLINOIS August 2012 UMI Number: 3527503 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent on the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. UMI 3527503 Copyright 2012 by ProQuest LLC. All rights reserved. This edition of the work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, MI 48106 - 1346 2 c Copyright by KENAN ARİFOĞLU 2012 All Rights Reserved 3 Abstract SUPPLY CHAIN MANAGEMENT IN THE PRESENCE OF STRATEGIC CONSUMERS AND CONSUMPTION EXTERNALITIES KENAN ARİFOĞLU In this dissertation, I study the management of supply chains in which consumers’ utilities from the product depend on the total consumption (consumption externalities) and all parties involved, consumers as well, maximize their own well-being (strategic consumers). I consider two practical motivations: vaccine for seasonal influenza (flu) epidemic and high-fashion luxury goods. In Chapter 2, I study the impact of yield uncertainty (supply side) and self-interested consumers (demand side) on the inefficiency in the influenza vaccine supply chain. Previous economic studies, focusing on demand side, find that the equilibrium demand is always less than the socially optimal demand since self-interested individuals do not internalize the social benefit of protecting others via reduced infectiousness (positive externality). In contrast, I show that the equilibrium demand can be greater than the socially optimal demand after accounting for the limited supply due to yield uncertainty and manufacturer’s incentives. The main driver for this result is a second (negative) externality: selfinterested individuals ignore that vaccinating people with high infection costs is more beneficial for the society when supply is limited. I show that the extent of the negative externality can be reduced through more efficient and less uncertain allocation mechanisms. In order to investigate the relative effectiveness of government interventions on supply and demand sides under various demand and supply 4 characteristics, I construct two partially centralized scenarios, where the social planner (government) intervenes either on the demand side or the supply side but not both, and conduct an extensive numerical analysis. In Chapter 3, I develop a mechanism which coordinates a supply chain with consumption externalities and a profit-maximizing manufacturer having uncertain production process in the presence of rational consumers. This mechanism includes tax/subsidy payments on the demand side (individual consumers) and a transfer payment on the supply side (manufacturer). I show that, under the mechanism, the manufacturer is ex ante better off; moreover, expected total utility of all individuals are higher. I also show that the mechanism allows arbitrary division of ex ante total social welfare between individuals and the manufacturer. Chapter 4 develops an analytical model to study the impact of snobbish (exclusivity-seeking) consumer behavior on a firm’s price and quantity decisions. I consider a profit-maximizing monopoly firm selling a product over two periods to two segments of consumers (with high and low valuation of the product), who are forward-looking and snobbish, i.e., their valuation of the product decreases as more people in the population consume it. This modeling framework enables me to explain the heterogeneity in pricing of snob appeal products observed in practice. Specifically, I find that markdown pricing is optimal when the fraction of high-value consumers is small whereas uniform pricing is optimal when this fraction is large. Thus, snobbish consumer behavior provides another motivation for markdown pricing. When selling to snobbish consumers, inter-temporal price discrimination increases product exclusivity and hence consumers’ willingness to pay, in addition to the usual effect of attracting consumers with different valuations. Similar to normal products, I find that advance purchase discounts are optimal only when consumers do not know their true valuations in the first period. However, I show that snobbish consumer behavior coupled with uncertain valuations may lead to discounts in advance. I use this modeling framework to formally distinguish between scarcity and exclusivity, where the former is defined with respect to the demand whereas the latter is defined with respect to the entire population. I find that 5 snobbish consumer behavior leads to scarcity, but not necessarily to exclusivity, i.e., the product may be exclusive even when consumers are not snobbish. Finally, contrary to intuition, I find that the product may become more exclusive when the price is marked down and hence price markdowns need not always be associated with excess inventory when selling to snobbish consumers. 6 Acknowledgements This dissertation would not have been possible without the guidance of my committee members, help from friends, and support from my family. I would like to express my deepest gratitude to my principal advisor, Prof. Seyed Iravani, for his guidance, caring, and providing me with an excellent free research atmosphere. I am indebted to my second advisor, Prof. Sarang Deo. I thank him for many stimulating academic discussions, his dedicated advising, his work ethic, and his incredible involvement, support and encouragement. I learned a lot from both of my advisors. I am very grateful to Prof. Izak Duenyas for his guidance and support during my research assistantship at the University of Michigan. He was a great resource for me. I enjoyed working with him and engaging in academic discussions. I thank my committee member Prof. Diego Klabjan for his thought-provoking questions and suggestions. I thank Prof. Martin Larivieri for always being there to discuss research problems. His suggestions greatly improved this dissertation. I thank Prof. Barış Ata for his mentorship. I have been very fortunate to know many people during my doctoral study at Northwestern University. I am thankful to all of my professors, classmates, and officemates. My special thanks go to Linlin, Luis, Mustafa, Neda, and Yan. I have benefited a lot from my conversations with them. I also would like to thank Ahmet, Betul, Can, Gökhan, Gürkan, Kezban, Koray, Muzaffer, and Yasin. They were a constant source of encouragement and support; it would have been very boring without their companionship. 7 Last, but definitely not the least, I am immensely grateful to my family, especially to my parents. It was their unconditional love, care, and encouragement which made this dissertation possible. Without their support, I do not think that I could overcome the difficulties during these years. 8 Dedication To my parents, Ali and Radet Arifoğlu, who made all of this possible, for their love and continuous support. 9 Contents Abstract 3 Acknowledgements 6 Dedication 8 List of Tables 11 List of Figures 12 Chapter 1. Introduction 14 Chapter 2. Consumption Externality and Yield Uncertainty in the Influenza Vaccine Supply Chain: Interventions in Demand and Supply Sides 19 2.1. Introduction 19 2.2. Literature Review 22 2.3. Model and Assumptions 24 2.4. Equilibrium in the Decentralized System 28 2.5. Optimal Solution of the Centralized System 33 2.6. Government Interventions 39 2.7. Deterministic Yield 43 2.8. Numerical Study 44 2.9. Conclusion and Future Research 50 2.A. Appendix for Chapter 2 51 10 Chapter 3. Coordinating Supply Chains with Uncertain Yield and Consumption Externalities 79 3.1. Introduction 79 3.2. Related Literature 81 3.3. Model Fundamentals 83 3.4. Social Optimum 86 3.5. Supply Chain Inefficiency and Coordination 88 3.6. Conclusion 97 3.A. Appendix for Chapter 3 99 Chapter 4. Pricing and Strategic Rationing When Selling to Snobbish Consumers 106 4.1. Introduction 106 4.2. Review of the Related Literature 110 4.3. Model Description 112 4.4. Capacity under Different Pricing Policies 114 4.5. Optimal Selling Strategy with Deterministic Consumer Valuations 122 4.6. Extensions 129 4.7. Conclusion and Future Research 138 4.A. Appendix for Chapter 4 140 Chapter 5. Conclusion and Future Research 162 5.1. Summary 162 5.2. Future research 165 Bibliography 167 11 List of Tables 2.1 Characterization of four systems analyzed 40 2.2 Values of input parameters 46 4.1 Equilibrium capacity with potentially-optimal APD when the population is homogeneous and consumer valuations are uncertain. 4.2 Equilibrium price, capacity and demand with potentially-optimal UP when the population is homogenous and consumer valuations are uncertain. 4.3 133 Equilibrium price, capacity and demand with potentially-optimal UP when the population is homogenous and consumer valuations are deterministic. 4.7 132 Equilibrium price, capacity and demand with potentially-optimal MP when the population is heterogeneous and consumer valuations are deterministic. 4.6 121 Equilibrium price, capacity and demand with potentially-optimal UP when the population is heterogeneous and consumer valuations are deterministic. 4.5 119 Equilibrium capacity with potentially-optimal MP when the population is homogeneous and consumer valuations are uncertain. 4.4 117 150 Equilibrium capacity with potentially-optimal MP when the population is homogenous and consumer valuations are deterministic. 150 12 List of Figures 2.1 Demand in the decentralized and centralized systems 2.2 Marginal social benefit when social planner decides the demand, where B (δ) is given by (2.14) 2.3 46 Sensitivity analysis of Availability and Negative Externality Effects when R0 = 3. The socially optimal β in each case is pointed by an arrow. 2.5 39 Value of centralized solution, and supply-side and demand-side interventions for w/c = 2, c = 3, θ = 10 and β = 0.25δ̄ 2.4 31 49 (a) Ex post demand in the decentralized equilibrium and social optimum; (b) The probability density function (PDF) and cumulative distribution function (CDF) of yield 53 2.6 (a) Ex post demand in the decentralized equilibrium and social optimum; (b) The probability density function (PDF) and cumulative distribution function (CDF) of yield 54 3.1 The additional gain/loss from vaccination under the mechanism (tnv (Qr ) − tv (Qr )) 94 3.2 Transfer payment from the government to the manufacturer (T (Qr )). 97 4.1 Firm’s selling strategy when consumer valuations are deterministic, i.e., α = 1 and β = 0. For a fixed vH , the plane (λ, θ) is divided into four (I-IV) regions. The θ̃ functions defining the boundary of regions are given by (4.30)-(4.32). 123 13 4.2 Firm’s capacity and the discount rate as a function of sensitivity to consumption (λ) when consumer valuations are deterministic, and vH = 15, vL = 5, c = 1, θ∗ ' 0.286 4.3 and N = 1000. 127 Firm’s optimal selling strategy when N = 1000, vH = 15, vL = 5 and c = 1. 136 14 CHAPTER 1 Introduction According to Global Supply Chain Forum, Supply chain management (SCM) is the integration of key business processes across the supply chain for the purpose of creating value for customers and stakeholders [Cooper et al., 1997]. In the last 30 years, SCM has gotten a lot of scholarly attention. Researchers in operations management /research studied various aspects of SCM, i.e., number and location of facilities in a supply chain, amount of capacity at each facility, allocation of facilities to market locations, inventory control, coordination and information sharing between the parties in a supply chain, etc. Chopra and Meindl [2004, pg. 31] consider “understanding the customer” as an essential part of SCM. The way consumers think and their motivations for consumption affect both marketing and supply chain strategies (i.e., operations, distribution and service) of a firm. Despite its importance, research modeling the effect of consumer behavior on supply chain strategies has recently started. Several papers in operations management [Dana and Petruzzi, 2001; Su and Zhang, 2008; Liu and van Ryzin, 2008; Cachon and Swinney, 2009] study forward-looking (strategic) consumer behavior. These papers assume that consumers are no longer myopic and choose the time of their purchase so as to maximize their utility. They show that strategic consumer behavior affects the pricing policy and capacity decision of a firm. For example, a firm selling to strategic consumers should set a lower capacity when the price is marked down over time since this discourages strategic consumers from waiting for lower prices [Su and Zhang, 2008; Liu and van Ryzin, 2008]. 15 A consumer’s purchasing behavior is not independent from that of other consumers. For example, if a consumer decide to buy the product, she decreases the product availability for all other consumers, as a result, it imposes negative consumption externality among consumers who are willing to purchase the product. This, in turn, discourages the consumers with low valuations from buying which results in lower aggregate demand. Operations management papers modeling strategic consumer behavior also consider the dependence between product availability and consumers’ purchasing decisions (see Shen and Su [2007] and Aviv et al. [2009] for an overview of these papers). However, consumption externalities affect the purchasing behavior of consumers not only through product availability. In fact, consumers value certain products based on the total consumption. For example, if too many people are vaccinated against an infectious disease, probability of infection is very low for each unvaccinated individual, so is the value of the vaccine. Similarly, a BMW on every driveway may dilute the value of the car to consumers [Amaldoss and Jain, 2005a]. Except two recent studies [Agrawal et al., 2011; Tereyağoğlu and Veeraraghavan, 2012], the dependence of consumer valuations on the total consumption is not studied in operations literature. Both Agrawal et al. [2011] and Tereyağoğlu and Veeraraghavan [2012] assume that consumers are exclusivity-seeking (snobbish), i.e., the product is less valuable if too many people purchase it. Agrawal et al. [2011] analyze product design and introduction decisions of a firm selling a durable good to snobbish consumers. They show that firms selling to snobbish consumers should design products that undergo slow value erosion, and should introduce them at high-price and low-volume. Tereyağoğlu and Veeraraghavan [2012] analyze the pricing and production decisions of a firm selling to a heterogeneous market which also includes snobbish consumers. They show that, depending on the market composition and consumers’ sensitivity to consumption, the firm may charge a higher price and set a lower capacity when selling to snobbish consumers. Certainly, a model ignoring strategic consumer behavior and consumption externalities cannot accurately represent the supply chain of certain products. The solution of such a model may exacerbate 16 the total supply chain inefficiency. Thus, in this research, we study the supply chains with strategic consumer behavior and consumption externalities. Our research is particularly motivated by the vaccine for seasonal influenza (flu) epidemic and luxury goods. In Chapter 2, we study the influenza (flu) vaccine supply chain in the USA. The influenza vaccine in the USA is produced by private companies through a complex and unreliable production process and consumers make their vaccination decisions in a rational and self-interested way [Pauly, 2005; Vietri et al., 2008]. The supply chain of vaccines, especially that of influenza vaccine, has long been studied by researchers in health economics (i.e., Brito et al. [1991]), epidemiology (i.e., Bauch and Earn [2004]; Reluga et al. [2006]; Galvani et al. [2007]) and operations management (i.e., Chick et al. [2008]; Deo and Corbett [2009]). Papers in health economics and epidemiology literatures focus only on the rational decision making by consumers and assume that the vaccine supply is unlimited whereas those in operations management literature study only the supply side and ignore the rational decision making by consumers. However, we consider both supply and demand sides and show that the interaction between them leads to novel insights. For example, Brito et al. [1991] find that when the vaccine supply is unlimited, the supply chain inefficiency is due to the positive externality, i.e., each consumer considers only direct benefits from vaccination but ignore the social benefits due to protecting others via reduced infectiousness, and hence the demand is lower in equilibrium than in the socially-optimal solution. In contrast, we show that when supply is endogenized, the supply chain inefficiency may be due to the negative externality, i.e., when the vaccine supply is limited, each consumer searching for the vaccine reduces the vaccine availability for other consumers, which results in equilibrium demand being higher than socially-optimal demand. Problems related to flu vaccine supply chain in the recent past have generated a lot of public as well as scholarly reactions advocating a need for a more active role by the government [Kilbourne, 1991; Harris, 2006; Hinman, 2005a]. However, there is considerable debate about the exact nature of this intervention. Opinions range from interventions focusing solely on the demand side (to induce demand) such as increased insurance coverage, improving accessibility and public awareness campaigns [Institute 17 of Medicine, 2004; Hinman, 2005b], to those focusing solely on the supply-side (to ensure more supply) such as subsidizing the manufacturers and even owning production facilities [Grady, 2004; Hinman et al., 2005]. To address this policy debate, in Chapter 2, we also analyze the relative effectiveness of government interventions in only one (demand or supply) side of the supply chain. In Chapter 3, motivated by flu vaccine supply chain, we design a mechanism which eliminates the entire inefficiency in a supply chain with consumption externalities and a profit-maximizing manufacturer having uncertain production yield. This mechanism aligns consumers’ incentives with social optimum through tax and subsidies on the demand side. To eliminate the inefficiency due to negative externality, the mechanism curbs the demand by taxing/subsidizing vaccinated/unvaccinated consumers for low realizations of production quantity. On the other hand, for high realization of production quantity, it taxes/subsidizes unvaccinated/vaccinated consumers to induce the demand and to decrease the inefficiency due to positive externality. On the supply side, our mechanism requires a transfer payment between the manufacturer and social planner. Through this transfer payment, the social planner shares the manufacturer’s risk due to uncetain yield. In Chapter 4, motivated by high-fashion luxury products, we develop a model to study the pricing policy and capacity decision of a monopolist firm selling a product over two periods to strategic and snobbish consumers who value a product less as more people consume it. The literature has identified demand uncertainty [Rodriguez and Locay, 2002; Nocke and Peitz, 2007], risk-averse attitude of consumers [Liu and van Ryzin, 2008] and uncertain consumer valuations [Möller and Watanabe, 2010] as some reasons why firms use inter-temporal pricing (e.g., price markdowns or advance purchase discounts) and why they create scarcity intentionally. We complement the literature by studying the implications of snobbish consumer behavior on firm’s pricing policy and capacity decision. We show that firms selling snob-appeal products intentionally create scarcity due to exclusivity-seeking consumer behavior [Rosenbloom, November 19, 2009]. We also find that the snobbish consumer behavior itself leads to the optimality of inter-temporal pricing when the number of consumers valuing the product high is low. Due 18 exclusivity-seeking consumer behavior, the firm creates scarcity to charge a higher price which creates rationing risk. Consumers with high valuations can pay more not to be rationed. Therefore, the firm sells the product at higher price and only consumers with high valuations purchase. Later, she reduces the price and satisfy demand coming from consumers with lower valuations. When the number of consumers with high valuations is very large (i.e., the firm has high brand image), the firm does not mark the price down and always charges a very high uniform price. Consistent with this result, we observe that brands with high image, e.g., Louis Vuitton and Hermes, never discount [Sherman, July 10, 2009]. Lastly, we summarize our main findings and discuss about the ideas for future research in Chapter 5. 19 CHAPTER 2 Consumption Externality and Yield Uncertainty in the Influenza Vaccine Supply Chain: Interventions in Demand and Supply Sides 2.1. Introduction Unlike pediatric vaccines, supply chain for the influenza (flu) vaccine in the U.S. is highly decentralized. Profit maximizing firms decide the production quantity and bring the produced vaccine to the market while individuals decide whether or not to get vaccinated in a rational and self-interested manner based on the availability of the vaccine, severity of the infection, and vaccination costs [Vietri et al., 2008]. The role of the government and its agencies such as the Center for Diseases Control and Prevention (CDC) is limited to deciding the vaccine composition and recommending priority groups for vaccination [Institute of Medicine, 2004; Government Accountability Office, 2004]. On the supply side, potentially insufficient incentives of manufacturers together with a long production process (six to eight months) and the significant uncertainty in the production yield have contributed to shortages in the recent past [Government Accountability Office, 2004]. On the demand side, positive externality effect associated with vaccination—each vaccinated individual decreases the infection risk of her close contacts but fails to internalize this value while making her own vaccination decision [Brito et al., 1991]— has arguably contributed to vaccination coverage rates that are lower than the socially desired target rates [Harper et al., 2005].