Theses Doctoral

Competition in Service Operations and Supply Chains: Equilibrium Analysis and Structural Estimation

Lu, Lijian

The service industry has become increasingly competitive. This dissertation addresses a number of outstanding and fundamental questions of competitions in service operations and supply chains. The challenges are characterization of the equilibrium behaviors, estimating the impact of firms' interactions, and designing of efficient market mechanisms.
The first chapter of this dissertation considers price competition models for oligopolistic markets, in which the consumer reacts to relative rather than absolute prices, where the relative price is defined as the difference between the absolute price and a given reference value. Such settings arise, for example, when the full retail price earned by the ``retailer" is reduced by virtue of a third party offering a subsidy or a rebate or in prospect theoretical models in which customers establish a reference price and base their choices on the differentials with respect to the reference price. When choosing among the various competing options, the consumer trades off the net price paid with various other product or service attributes, as in standard price competition models. The reference price may be exogenously specified and pre-announced to the competing firms. Alternatively, it may be endogenously determined, as a function of the set of absolute prices selected by the competing firms, for example the lowest or the second lowest price. We characterize the equilibrium behavior under a general reference value scheme of the above type; this in a base model, where we assume that the consumer choice model is of the general MultiNomialLogit (MNL) type. We also derive comparison results for the price equilibria that arise under alternative subsidy schemes. These comparisons have important implications for the design of subsidy schemes.
The second chapter applies the results of the first chapter to the Medicare insurance market, both in terms of its existing structure, as well as in terms of various proposals to redesign the program. Based on an oligopoly price competition model tailored towards this market, and actual county-by-county data for the year 2010, we estimate the impact such reforms would have on the plans' market shares, equilibrium premia, the government's cost, and the out-of-pocket expenses of the beneficiaries. We employ two different methodologies to derive the parameters in the county-by-county competition models: (i) a calibration model, and (ii) parameter distributions obtained from models estimated in Curto et al. (2015). The predicted impacts on the above performance measures are remarkably consistent across the two methodologies and reveal, for example, that the government cost would decrease by 8% if the traditional fee-for-service(FFS) plans are kept out of competitive bidding process and by 16.5%-21% if they are part of the process.
The third chapter studies a class of buy procurement mechanisms, framework agreements (FAs), that are commonly used by buying agencies around the world to satisfy demand that arises over a certain time horizon. We are one of the first in the literature that provides a formal understanding of FAs, with a particular focus on the cost uncertainty faced by bidders over the FA time horizon. We introduce a model that generalizes standard auction models to include this salient feature of FAs; we analyze this model theoretically and numerically. First, we show that FAs are subject to a sort of winner's curse that in equilibrium induces higher expected buying prices relative to running first-price auctions as needs arise. Then, our results provide concrete design recommendations that alleviate this issue and decrease buying prices in FAs, highlighting the importance of (i) monitoring the price charged at the open market by the FA winner and using it to bound the buying price; (ii) investing in implementing price indexes for the random part of suppliers' costs; and (iii) allowing suppliers the flexibility to reduce their prices to compete with the open market throughout the selling period. These prescriptions are already being used by the Chilean government procurement agency that buys US$2 billion worth of contracts every year using FAs.
The fourth chapter considers the preference of contractual forms in supply chains. The supply chain contracting literature has focused on incentive contracts designed to align supply chain members' individual interests. A key finding of this literature is that members' preferences for contractual forms are often at odds: the upstream supplier prefers more complex contracts that can coordinate the supply chain; however, the downstream retailer prefers the wholesale price--only contract because it leaves more surplus (than a coordinating contract) that the retailer can get. This chapter addresses the following question: under what circumstances do suppliers and retailers prefer the same contractual form? We study supply chain members' preference for contractual forms in three different competitive settings in which multiple supply chains compete to sell substitutable products to the same market. Our analysis suggests that both upstream and downstream sides of the supply chains may prefer the same ``quantity discount'' contract, thereby eliminating the conflicts of interest that otherwise typify contracting situations. More interesting still is that both sides may also prefer the wholesale price--only contract, which offers a theoretical explanation to why the simple inefficient contract is widely adopted in supply chain transactions.


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More About This Work

Academic Units
Thesis Advisors
Federgruen, Awi
Ph.D., Columbia University
Published Here
September 27, 2016