Pricing and Contract Theory in Operations Management
"Ascending Auctions for Markets with Structured Externalities" with Craig Boutilier
PUBLISHED and SUBMITTED PAPERS:
"Optimal Price-Lead Time Menus for Queueing Systems with Customer Choice: Priorities, Pooling and Strategic Delay" with Philipp Afèche
"When Gray Markets Have Silver Linings: All-Unit Discounts, Gray Markets and Channel Management" with Ming Hu and Mengze Shi
"Corporate Payout Policy, Cash Savings, and The Cost of Consistency: Evidence from a Structural Estimation" with Hamed Mahmudi
"Inverse Optimization for the Recovery of Market Structure from Market Outcomes: An Application to the MISO Electricity Market" with John Birge and Ali Hortašsu
Abstract: We propose an inverse optimization based methodology to determine market structure from the locational pricing of a commodity. The methodology requires that the market optimally allocates goods and that locational prices correspond to shadow prices of this optimization problem. As a case-in-point, we study locational marginal price based electricity markets where prices are determined using the results of a centralized optimization for clearing the market. We apply the inverse optimization methodology to outcome data from the Midcontinent ISO electricity market and uncover transmission constraints explaining the price variation. We also discuss analytical applications such as identifying missing data. To broaden the scope of applications, assumptions sufficient to justify the methodology for competitive markets are described.
"The Role of Financial Players in Electricity Markets: An Empirical Analysis of MISO" with John Birge, Ali Hortašsu and Ignacia Mercadal
Abstract: As in most commodities markets, deregulated electricity markets allow the participation of purely financial (virtual) traders to enhance informational and productive efficiency. The presence of financial players is expected, among other things, to help eliminate predictable pricing gaps between forward (day-ahead) and spot prices, which may arise in the presence of market power by physical suppliers or buyers. However, we find that the impact of financial players on reducing pricing gaps has been limited. A forward premium persists. Surprisingly, some large financial players appear to be betting in exactly the opposite direction of the pricing gap, sustaining large losses while doing so. We find evidence consistent with participants using forward market bids to affect congestion and thus increase the value of their Financial Transmission Rights (FTR). I.e. these financial players incur losses with one financial instrument in order to make larger profits with another, introducing artificial congestion to the system. Our findings point to the challenges of achieving market efficiency through purely financial players when the underlying physical market is segmented and subject to the exercise of market power in each segment.
"Optimal Price-Lead Time Menus for Queueing Systems with Customer Choice: Priorities, Pooling and Strategic Delay"
Abstract: The results in this paper address the question of evaluating and optimally implementing price-lead time menus for congested service providers when market knowledge is limited. We formulate the economic assignment problem for the allocation of lead-times to customers who are heterogeneous in their value for service and sensitivity to delay as a deterministic optimization. For a linearized version of the problem we show that the duality gap is equal to the apparent loss which is the difference between current revenue and the maximum feasible revenue under the current pricing scheme. The apparent loss is shown to have the following characteristics: it is an upper bound on the difference between current and maximum welfare, minimizing apparent loss also minimizes welfare, and it can be calculated from operational information. We show that these characteristics of the apparent loss hold for the non-linear version of the problem as long as the function describing total delay in the system is convex. We argue that the apparent loss is a useful heuristic for evaluating the quality of a particular pricing scheme when market information is costly or not available and use the measure as a guide for a dynamic pricing algorithm. The dynamic pricing algorithm is initialized with a known set of feasible prices and shown through computational experiments to find pricing schemes which deliver near optimal welfare.
"Optimal Price-Lead Time Menus for Queueing Systems with Customer Choice: Priorities, Pooling and Strategic Delay" with Philipp Afèche Download from SSRN
Abstract: We study the optimal design of price-lead time menus to maximize revenues from heterogeneous time- sensitive customers with private information about their price and time-sensitivity. Our findings are as follows. 1. Delay cost minimization and revenue maximization may be incompatible: the lead time menu attained by a work conserving strict priority policy minimizes the delay cost but need not be optimal under revenue maximization. 2. The optimal lead time menu may deviate in two fundamentally different ways from the conditionally optimal menu given a work conserving strict priority policy. (i) It may be optimal to pool multiple different customer types into a single service class. (ii) It may be optimal to artificially inflate the lead times of certain service classes through the insertion of strategic delay. We identify conditions for pooling and strategic delay to be optimal depending on the capacity level and market parameters. In particular, we find that the virtual delay costs play an important role in determining the structure of the optimal lead time menu, and that the functional form of these delay costs differ depending on which subset of customers are admitted. 3. Under the conditionally optimal menu given a work conserving strict priority policy, it may be optimal at high capacity levels to strategically exclude low value customers which would otherwise be served with strategic delay under the optimal menu.
"When Gray Markets Have Silver Linings: All-Unit Discounts, Gray Markets and Channel Management" with Ming Hu and Mengze Shi Download from SSRN
Abstract: Gray markets are unauthorized channels of distribution for a supplier's authentic products. This paper studies a distribution channel that consists of a supplier who offers all-unit quantity discounts for batch orders to enjoy cost savings, and a reseller who may divert some goods to the gray markets. Our analysis shows the impact of gray markets depends on the reseller's batch inventory holding cost. When the reseller's batch inventory holding cost is high, diversion to the gray markets improves the channel performance by enabling the reseller to make batch orders. Since the reseller's order costs decrease through quantity discounts, diversion to the gray markets reduces the resale price and expands sales to the authorized channel. On the other hand, when the reseller's batch inventory holding cost is low, the reseller would make the batch orders even without the gray markets. In this case the diversion to the gray markets may improve the reseller's performance by shortening the order cycles and reducing the inventory holding costs. Interestingly, since diversion to the gray markets decreases the reseller's peak inventory volume, the reseller has the reduced incentive to push its inventory and, consequently, the resale price rises and sales volume decreases in the authorized channel. These results underscore the importance of firms integrating inventory and pricing decisions when managing distribution channels affected by gray markets.
"Corporate Payout Policy, Cash Savings, and The Cost of Consistency: Evidence from a Structural Estimation" with Hamed Mahmudi Full Text
Abstract: We develop a dynamic model in which firms choose their optimal financing, investment, dividends, and cash holdings while facing costly equity issuance, debt and capital adjustments costs, and taxed interest on cash balances. We solve the model numerically to estimate the volatility of payout and optimal level of cash holdings. Comparing these results with a large sample of U.S. firms from 1988 to 2007, we show that on average firms excessively smooth their payout while maintaining larger than optimal levels of cash (excess cash) on their balance sheets. We further extend the base-case model to capture the effect of a manager, who perceives a cost to cutting payout. Applying simulated method of moments (SMM) to the dynamic model we infer the magnitude of this downward adjustment cost. In particular, we find that a managerial preference for payout smoothing leads to increased accumulation of excess cash. Estimated payout consistency cost is larger for firms which are larger, have more dispersed analyst forecasts, which compensate their CEOs with low pay-performance packages, have larger institutional holdings, and pay larger fractions of their payout as dividends. Applying SMM to a recent subsample of the data (2002-2006), we show that the parameter of managerial preference for consistent payout continues to account for a similar equity value loss of approximately 7%.
"Ascending Auctions for Markets with Structured Externalities" with Craig Boutilier
Abstract: While ascending auctions have found considerable popularity applied to combinatorial allocation problems, recent proposals for ascending auctions which account for externalities have placed signicant demands on bidding agents by requiring that they accurately value and communicate bids on the full outcome space (including the allocations awarded to competitors). This requirement is unreasonable in most practical set- tings. We identify a large class of problems, including wireless networks with interference, where externalities are characterized by aggregate resource usage. We propose a more general allocation model in which such problems can be naturally encoded. We adapt recent ascending auctions for combinatorial allocations to this model and show that, given myopic bidders, our mechanism optimizes social welfare. We illustrate its performance in a multi-hop wireless network domain with interference.
"Ascending Auctions for Markets With Structured Externalities and Applications to Routing in Wireless Networks" Master's Thesis Supervised by Professor Craig Boutilier Full Text
Abstract: This thesis addresses the problem of finding socially optimal routing
allocations in wireless networks with selfish users. We
model the problem as a resource allocation problem in a market
with externalities. Finding an optimal solution to the underlying resource
allocation problem requires solving a mathematical program with
non-convex constraints which is difficult to approach using traditional
distributed price-mediated allocation mechanisms.
"Stochastic Local Search for Scheduling for Minimum Total Tardiness" BSc Honour's Thesis Supervised by Holger Hoos Full Text (AI 2003 version)
Abstract: The multi-processor total tardiness problem (MPTTP) is an NP-hard scheduling problem, in which the goal is to minimise the tardiness of a set of jobs that are processed on a number of processors. Exact algorithms like branch and bound have proven to be impractical for the MPTTP, leaving stochastic local search (SLS) algorithms as the main alternative to find high-quality schedules. Among the available SLS techniques, iterated local search (ILS) has been shown to be an effective algorithm for the single processor case. Here we extend this technique to the multi-processor case, but our computational results indicate that ILS performance is not fully satisfying. To enhance ILS performance, we consider the use of population-based ILS extensions. Our final experimental results show that the usage of a population of search trajectories yields a more robust algorithm capable of finding best known solutions to difficult instances more reliably than a single ILS trajectory.
When not in the office I like to spend time with my wife and two daughters.