Management Insights

Abstract

Sampsa Samila, Olav Sorenson Are noncompete covenants bad for business? Based on a panel of metropolitan areas in the United States from 1993 to 2002, the authors find that the enforcement of noncompete clauses significantly impedes entrepreneurship and employment growth. They find that states that restrict the scope of noncompete agreements experience an increase in the local supply of venture capital. Furthermore, these states with weaker noncompete restrictions have positive effects on the number of patents, the number of firm starts, and employment. The insight for management: Policy makers can encourage growth through less restrictive noncompete regulation and enforcement. Matthew S. Bothner, Joel M. Podolny, Edward Bishop Smith What is the best way to design tournaments for status, in which individuals labor primarily for the esteem of their peers? What process, in other words, should organizers of status-based contests impose on those who covet peer recognition? The authors consider two competing alternatives. It is commonly held that the “Matthew Effect” dominates—wider distribution of rewards increases the overall welfare of the contest. The authors find a “Mark Effect,” a tighter distribution of rewards, as an alternative way to increase tournament welfare for most tournaments. The Matthew Effect is preferable in two situations: in small tournaments where variation in underlying ability translates into acute advantages for the most capable contestants and in large tournaments whose contestants face constant marginal costs. The insight for management: New approaches to competition design might improve outcomes of status competitions. Avi Goldfarb, Catherine Tucker Are online and traditional advertising substitutes? Using data on the advertising prices paid by lawyers for 139 Google search terms in 195 locations, the authors examine “ambulance chaser” advertising behavior given different regulations across states. They find that when lawyers cannot contact potential clients by mail, advertising prices per click for search engine advertisements are 5%–7% higher. They conclude that online advertising substitutes for offline advertising. The substitution toward online advertising is strongest in markets with fewer customers, suggesting that the relationship between the online and offline media is mediated by the marketers' need to target their communications. The insight for management: Online and traditional advertising are effective substitutes. David A. Schweidel, Eric T. Bradlow, Peter S. Fader AT&T, Fidelity, Verizon, Time Warner, and other multidimensional service providers want to know: How much is a multiproduct customer worth, and does that worth change over time? Such insights help service providers with customer valuation and prediction of customers' future behavior such as acquiring additional services, dropping some current services, or ending the relationship entirely. The authors identify two sources of dynamics: portfolio inertia and service stickiness. They show that customers who have discarded a particular service may have an increased risk of canceling all services in the near future but paradoxically also may be more prone to acquire more services in the future. The insight for management: Customers who actively change their product and service portfolios are a key market segment for target marketing both for retention and for increased service offerings. Andreas Blöchlinger, Markus Leippold The 2005 Basel Committee on Banking Supervision lamented the lack of test statistics for validating probabilities of default, which banks use to forecast credit default events. As past disruptions in the credit markets suggest, prediction models for forecasting credit defaults are at the basis of sound risk-management practice and credit pricing. Even if the inaccuracy is small, an inadequately calibrated prediction model may cause substantial losses. The authors develop a new, more powerful, and more accurate test for validating the performance of probability forecasts. The insight for management: Appropriate forecasting techniques can help improve performance and reduce risk such as credit default. Manel Baucells, Martin Weber, Frank Welfens Decision makers with “reference-dependent preferences” assess outcomes based not on their total value, but on their value relative to some previously attained value. This approach to assessing decision making is well accepted. But what if there are multiple previous references? Little is known about how decision makers form and update their reference points given a sequence of information. For example, if a shopper sees multiple prices over time, how is the final price perceived relative to all of the previous prices? Interestingly, these authors find in their financial experiments that the subjects' reference price is best described as a combination of the first and the last price of the time series, with intermediate prices receiving smaller weights. The insight for management: First and last impressions weigh far greater than intermediate information to decision makers. Ramji Balakrishnan, Stephen Hansen, Eva Labro What is the cost per unit? This seemingly innocuous and ubiquitous question in business is much tougher to answer than one might think and is critical to resource allocation decisions. Marginal and average costs, fixed and variable costs are not always obvious, and appropriate data are not always available, so managers use rules of thumb for allocating costs. In particular, because of informational limitations, when designing cost systems, firms use simple rules of thumb to group similar resources into cost pools and to select drivers used to allocate the pooled costs to products. The authors compare size-based rules for forming cost pools with more information-intense correlation-based rules and develop a blended method that performs well in terms of accuracy. They find that significant gains can be made from using a composite driver rather than selecting a driver based on the consumption pattern for the largest resource only. The insight for management: The heuristics embedded in costing systems have a big impact on resource allocation; improved costing methodologies can result in improved allocation decisions. Pavlo R. Blavatskyy How can the choice of a decision maker be predicted if the decision maker is inconsistent? If one choice clearly dominates the other, prediction is straightforward. However, if neither choice is clearly dominant, a decision maker chooses in a probabilistic manner. The author proposes a model that provides a better fit to experimental data than do existing models. The insight for management: A new choice model can be used to better predict probabilistic choices. Natarajan Balasubramanian Which start-up environment is more conducive to firm productivity: existing firms, spinoffs of existing firms, or entrepreneurial entrants? The author suggests that firm experience prior to setting up a new venture influences the ability to learn from experience after start-up, and that this relationship is moderated by the importance of learning by doing within the new venture's industry. Using data on 47,915 new plant ventures in U.S. manufacturing, the author finds that incumbents and diversifying entrants establish significantly more productive new plants than entrepreneurial entrants and that this advantage significantly increases with the importance of learning by doing in an industry. Surprisingly, these productivity differences appear to be driven more by learning subsequent to plant start-up than by initial disparities in productivity. The insight for management: Pre-start-up experience adds to the process of post-start-up learning, and the industry learning environment plays an important role in whether entrepreneurial firms can achieve a competitive advantage over existing firms. Albert Y. Ha, Shilu Tong, Hongtao Zhang Is more shared information in the supply chain always better? It is generally believed that if a retailer shares information with a manufacturer, the entire supply chain is better off because of improved coordination and allocation of resources. The authors study the incentive for vertical information sharing in competing supply chains with production diseconomies of scale under various forms of competition. In each case that the authors examine, information sharing benefits the supply chain when the production diseconomy is large or competition is less intense. However, the authors find that, under one set of assumptions surrounding the form of competition, a manufacturer may be worse off by receiving information. The authors also find that, under some assumptions surrounding the form of competition, information sharing by retailers is beneficial depending on the relative accuracy of the information being shared. Finally, competitive reaction to information sharing might undermine the intended benefits. The insight for management: More information sharing will not always improve supply chain profitability. Gijs van de Kuilen, Peter P. Wakker When predicting outcomes of decisions, how do models capture risk attitudes, subjective beliefs, and ambiguity attitudes? The authors propose a “midweight method” based on a convenient way to obtain midpoints in the weighting function scale. The method can be used both for risk (known probabilities) and for uncertainty (unknown probabilities). The resulting integrated treatment of risk and uncertainty is particularly useful for measuring ambiguity, i.e., the difference between uncertainty and risk. The insight for management: A new and more tractable and efficient method to measure uncertainty and ambiguity attitudes yields plausible results for ambiguity aversion and seeking behaviors. Weixin Shang, Liming Liu A firm wants to promise quick delivery to make the sale but has to guard against the risk of breaking that promise and reducing its quality of service. What is the interaction of promised delivery time and quality of service with respect to competitive behaviors? The authors investigate firms' competitive behaviors in industries where customers are sensitive to both promised delivery time and quality of service as measured by the on-time delivery rate. This study provides numerous insights. First, competing in such an environment may lead firms to overinvest in capacity, with none gaining a competitive advantage. Second, a uniform reduction in capacity cost across the board may harm everyone. Third, quality differentiation in terms of improved on-time delivery can help a firm to compete more effectively or to preempt competitors and protect a market advantage.