Heterogeneous Valuations Research Articles

Freight network design with heterogeneous values of time

Abstract This paper aims to demonstrate the effect of recognizing heterogeneity in values of time on the design of a hub network for freight transportation. By taking the VOT distribution into account, we emphasize shippers’ broader logistical, social and economic situation in the network design, and are not limited to commodity types. The paper employs the single allocation p-hub median problem which minimizes the total generalized transportation cost (time, distance, etc.) with given demands. VOT is assumed to be discretely distributed, and estimated by mean-dispersion model and Latent Class model, based on a Stated Preference survey conducted in China, investigating railway shippers’ choice behavior of railway services. A local railway network with 14 nodes and 20 linkages is applied to discuss the effect of VOT distribution on multiple (i.e., 3) hub location strategy. Simulated Annealing (SA) is designed to solve the single allocation p-hub median problems. The numerical results shows that the VOT and its distribution should be taken into account for better simulating railway shippers’ heterogeneous valuations of service time versus time.

Railway shippers’ heterogeneous preferences with random parameters latent class model

Abstract Railway shippers’ preferences heterogeneity is caused by their attitudes and perception towards attributes of various rail freight services, and is differentiated amongst shippers. Random Parameter Latent Class (RPLC) model is applied to elicit Chinese railway shippers’ preferences heterogeneity in both continuous and discrete way. With a Discrete Choice Experiment (DCE) conducted in southwest area of China, 83 respondents are counted to calculate their utilities towards five rail service attributes: cost, time, frequency, reliability and safety. Results by RPLC model are compared with MNL, ML and LC model, and shows that quality attributes are more preferred by railway shippers than price attributes. Further market segmentation with RPLC clarifies that heterogeneous valuation of railway freight service quality dimension does exist among shippers, and segmentation according to shippers latent variables can be more suitable than the traditional exogenous market segmentation way. For railway companies in China, multidimensional freight services could be provided by the combination of different attributes and levels, to attract more and more shippers making railway as their first choice.

Key Factors for Green Product Line Design: Opposing Consumer Perceptions, Cost Implications, Price and Quality Optimization

We consider the price and quality optimization (i.e., product line design) problem of a monopolist selling (at most) two product variants, a base product and a green variant that comprises recycled/reused content, to a market of two distinct consumer types with heterogeneous valuations for the base product. Our setting features three distinguishing elements, which had hitherto not been considered together in the literature: (i) Consumer segments demonstrate opposing perceptions of the green variant, i.e., “conventionals” associate dis-utility with a green variant that has more recycled/reused content, whereas “naturalites” have a higher willingness-to-pay for the same. (ii) Including a green variant yields diseconomies-in-scope for the firm’s production costs, which increases non-linearly as product variants become more vertically (and environmentally) differentiated. (iii) Using more recycled/reused content for the green variant permits input material cost savings. Using an endogenous demand model and non-linear programming theory, we characterize the economic conditions under which a monopolist can profitably cover the entire market by maintaining a uniformly green product line, i.e., by selling only the green product variant. When such equilibrium outcomes result, the firm’s traditional profit maximization objective coincides with an environmentally-conscious outcome. We also assess the demand segmentation and firm profit consequences of underestimating the naturalites’ (conventionals’) marginal utility (dis-utility) for a green variant with more recycled/reused content, and show that such missteps may yield adverse implications for both firm profits and the environment.

Strategic Fragmented Markets

We study the determinants of asset market fragmentation. We develop a model of market formation in which investors with heterogeneous valuations for an asset trade strategically. When choosing a dealer with whom to trade, investors trade off the lower price impact and the steeper competition for the dealer's liquidity offered by a larger market. When the correlation among investor valuations is high, the increase in competition dominates the decrease in price impact and investors prefer to trade in a smaller market, which makes market fragmentation an equilibrium outcome. Fragmented market structures can Pareto dominate centralized ones and can exhibit higher trading volumes.

Coordinating Supply and Demand on an On-Demand Platform: Price, Wage, and Payout Ratio

Consider a situation when an on-demand service platform uses earnings-sensitive independent providers with heterogeneous reservation price (for work participation) to serve its wait-time and price sensitive customers with heterogeneous valuation of the service. As such, both the supply and demand are “endogenously” dependent on the price the platform charges its customers and the wage the platform pays its independent providers. In this paper, we present a queueing model with endogenous supply (number of participating agents) and endogenous demand (customer request rate) to model this on-demand service platform. To coordinate endogenous demand with endogenous supply, we use the steady state performance in equilibrium to characterize the optimal price, optimal wage and optimal payout ratio (i.e., the percentage of the platform’s revenue that is paid to the providers) that maximize the profit of the platform (as well as the total welfare). We find that it is optimal for the platform to charge a higher price, pay a higher wage, and offer a higher payout ratio (i.e., the ratio of wage over price) when the potential customer demand increases. Furthermore, when customers become more time-sensitive, the same result holds except that the platform would need to charge a lower price in order to sustain the customer demand.

Sorting in Iterated Incumbency Contests

This paper analyzes iterated incumbency contests with heterogeneous valuations in a large population setting. Incumbents repeatedly face different challengers, holding on to their positions until defeated in a contest. Defeated incumbents turn into challengers until they win a contest against an incumbent, thereby regaining an incumbency position. We consider steady-state equilibria of this process and study how and to which extend individuals sort into the incumbency positions depending on their valuations. In particular, we identify sufficient conditions for positive sorting, meaning that the share of individuals with a given valuation holding an incumbency position is increasing in the valuation, and provide an example to show that negative rather than positive sorting may arise in equilibrium. Further results show how incumbency rents and sorting are affected by the frequency at which incumbency is contested and the scarcity of the incumbency positions.

Public Goods in Endogenous Networks

We study a local public good game in an endogenous network with heterogeneous players. The source of heterogeneity affects the gains from a connection and hence equilibrium networks. When players differ in the cost of producing the public good, active players form pyramidal complete multipartite graphs; yet, better types need not have more neighbors. When players differ in the valuation of the public good, nested split graphs emerge in which production need not be monotonic in type. In large societies, few players produce a lot; furthermore, networks dampen inequality under cost heterogeneity and increase it under heterogeneity in valuation. (JEL D63, D85, H41)

Peer-to-Peer Sharing of Private Goods: Sellers’ Response and Consumers’ Benefits

AbstractWe study how the presence of consumers’ peer-to-peer sharing option in addition to exclusive ownership affects sellers’ pricing and product design decisions, as well as consumers’ benefits. We identify the conditions in which a seller would accommodate or hinder sharing by pricing the product appropriately. The seller’s profit can be enhanced by accommodating sharing when consumer valuation heterogeneity is neither too high nor too low. Second, sharing does not always improve consumers’ access to goods, and consumers’ access is the most constrained in product categories of medium intrinsic value. Third, existing consumers who seek exclusive ownership may end up being worse off in markets where, without the sharing option, the seller would price the product such that sharing consumers could afford to own the product. Finally, sharing enhances the seller’s incentive to improve product quality in markets where sharing consumers cannot afford to own the product if sharing is precluded.

Heterogeneous Valuation of Quality Dimensions of Railway Freight Service by Chinese Shippers: Choice-Based Conjoint Analysis

This paper operationalizes and tests approaches to identify market segments for rail freight services and measures the importance that customers attach to rail service attributes (i.e., transport cost, time, frequency, reliability, and safety). The approach is based on choice-based conjoint analysis in which heterogeneity is captured by means of latent-class analysis. The research is novel in several respects. First, it addresses the diverse valuation of service preferences by shippers who use rail transport. Second, besides estimates for rail users who contract for transport services, the analysis also arrives at new estimates for forwarders as immediate clients for rail services. Third, in addition to the conventional random utility maximization (RUM) model, the paper discusses trials with a random regret minimization (RRM) model and a hybrid RUM-RRM model. Finally, the research produces unique values for China, one of the largest rail transport markets in the world.

The Impact of Limited Supply on a Firm's Bundling Strategy

A firm's two‐product bundling decision is examined when the supply of one product is limited and consumer valuations are normally distSteckeributed. The firm can choose to sell products separately and/or through a bundle. We find that the impact of limited supply on a firm's bundling decision depends on the correlation between the consumer valuations of the two products as well as the symmetry level of the two products in terms of their attractiveness (how much they are valued by consumers). When the valuation correlation is high and the symmetry level of the two products is low, limited supply can drive bundling. When the valuation correlation is low or the symmetry level is high, limited supply can drive no bundling. When the attractiveness of both products are low or the valuation correlation is very high, limited supply has no impact on a firm's bundling decision: The firm should not bundle for all supply levels. This study offers a new driver for product bundling: the limited supply of a product. The existing bundling literature suggests that a firm should bundle symmetric products that have a low consumer valuation correlation, when bundling is driven by consumer valuation heterogeneity reduction. In contrast, when bundling is driven by limited supply, a firm should bundle asymmetric products with a high consumer valuation correlation. The benefit of supply‐driven bundling depends on the severity of supply limitation. When supply limitation is moderate, bundling creates value by expanding the market of the less attractive product. When supply limitation is severe, bundling enables a firm to extract a higher margin from the less attractive product.

Mobile-Only Consumers Arise from Heterogeneous Valuation of Fiixed Services

Mobile-only users are usually considered as a consequence of fixed-mobile substitution. Via a unique dataset based on a a large European country survey and consumers' invoice data, this study reveals heterogeneous preferences for fixed services among consumers. The data is fitted in a mixed logit model and willingness to pay (WTP) for fixed communications services are estimated. Results show that mobile-only consumers have a WTP for fixed services of 15 € per month, while the WTP of users of both fixed and mobile services is thrice higher. Considering that a typical monthly fee for fixed services is around 30 €, the heterogeneous preferences for fixed services constitute an alternative explanation for the existence of mobile-only users, despite the complementarity of fixed and mobile broadband.

Supply chain contracting for vertically differentiated products

We study a supply chain where the supplier sells a family of vertically differentiated products with varying quality levels through a network of distributors to end consumers who have heterogeneous valuations for quality. With traditional wholesale pricing, it has been shown that the supplier does not share the same incentives as the distributors to sell higher quality products and as a result their economics are not well aligned.To analyze this problem, we consider the simplistic case in which the product family consists of two products with high and low quality. After arguing for the two kinds of distortions caused by the firm׳s status-quo wholesale pricing, we show that some of the earlier contracts studied for one product can be designed to achieve supply chain coordination for this setting with two vertically differentiated products; similarly, we propose a completely new (bundling) contract that is easy to communicate within the supply chain and show that an existing contract (ASP) currently in use in the industry does not necessarily align the incentives and achieve coordination. Because manufacturers generally have a network of distributors, we then extend our results to the case of Cournot competition. We first characterize the emerging equilibrium and then analyze a similar set of coordinating mechanisms. We show that the efficiency of the wholesale pricing contract improves as the number of competitors increases which means competition eliminates not just the well-known double marginalization, but also the vertical double marginalization-a distortion and source of inefficiency specific to this environment.

How Does Ambiguity Influence IPO Underpricing? The Role of the Signalling Environment

ABSTRACTWe explore the relationship between ambiguity, or low information clarity, in the IPO prospectus of newly public firms and their underpricing. Consistent with signalling theory, we find that IPO underpricing is low when the prospectus contains less ambiguous information that creates a more reliable signal conveying the quality of the IPO firm. However, the positive association between ambiguity and IPO underpricing is less pronounced when IPO firms display low strategic conformity with other firms in the industry, operate in industries with high valuation heterogeneity, or are medium‐sized. Using a sample of 398 IPOs between 1998 and 2007, our results support these predictions. This study shows the importance of the signalling environment influencing boundedly rational signal recipients interpreting ambiguous signals.

Reprint of ‘Yes-in-my-backyard’: Spatial differences in the valuation of forest services and local co-benefits for carbon markets in México

Forests provide many and large benefits, including cost-efficient climate change mitigation. However international carbon markets have not stimulated the demand for forestry offsets. Domestic market-mechanisms are emerging in many countries and forests could be highly valued through these policies as most of the benefits produced by forests are enjoyed locally. Here, a choice experiment explores drivers of valuation and willingness to pay for forest carbon services in voluntary markets in Mexico by comparing the valuation of citizens from four regions to test geographical preference for projects (n=645). Findings from multinomial-logit models show valuation of forest carbon services is transferable and citizens would pay more for offsets from projects closer to their homes. Proximate forests provide a range of co-benefits to local users, including environmental services and opportunities for recreation. Factors related to valuation include sense of responsibility, previous knowledge of carbon emissions, previous visits to the sites, regional identification and the valuation of local environmental services (e.g. improvements in local air quality). Knowledge of spatial heterogeneity in valuation of the use of forest services can help to design market-based instruments by identifying highly valued areas for environmental services programs and carbon markets.

Demand Uncertainty and the Bayesian Effect in Markdown Pricing with Strategic Customers

This paper studies the role of demand uncertainty in temporal discrimination when the retailer applies markdown pricing facing strategic customers. We consider a model in which a retail firm announces a pair of declining prices for two selling periods, and customers with heterogeneous valuations each decide whether to buy a unit early, later or never. In this model, if the demand function is linear and its parameters are common knowledge, there never exist any markdown prices that achieve temporal discrimination for any feasible model parameters. Either all buying customers wait, or all buy early. By contrast, if the demand level is unknown, there always exists a temporally discriminating markdown pricing scheme for all feasible model parameters. We derive qualitative insights to the way demand uncertainty and Bayesian updating contribute to temporal discrimination, which broadly apply to nonlinear demand functions as well. We also show that in case of demand uncertainty, there always exists a temporally discriminating pricing scheme that yields a strictly higher profit to the retailer than the optimal static pricing scheme. Ironically, however, the retailer cannot implement the optimal scheme due to the same demand uncertainty.

‘Yes-in-my-backyard’: Spatial differences in the valuation of forest services and local co-benefits for carbon markets in México

Forests provide many and large benefits, including cost-efficient climate change mitigation. However international carbon markets have not stimulated the demand for forestry offsets. Domestic market-mechanisms are emerging in many countries and forests could be highly valued through these policies as most of the benefits produced by forests are enjoyed locally. Here, a choice experiment explores drivers of valuation and willingness to pay for forest carbon services in voluntary markets in Mexico by comparing the valuation of citizens from four regions to test geographical preference for projects (n=645). Findings from multinomial-logit models show valuation of forest carbon services is transferable and citizens would pay more for offsets from projects closer to their homes. Proximate forests provide a range of co-benefits to local users, including environmental services and opportunities for recreation. Factors related to valuation include sense of responsibility, previous knowledge of carbon emissions, previous visits to the sites, regional identification and the valuation of local environmental services (e.g. improvements in local air quality). Knowledge of spatial heterogeneity in valuation of the use of forest services can help to design market-based instruments by identifying highly valued areas for environmental services programs and carbon markets.

Product differentiation design under sequential consumer choice process

We consider a product variety design problem with respect to both vertical and horizontal differentiation dimensions under a sequential consumer choice process. Consumers have heterogeneous valuations for product quality as well as different preferences for product type. We consider two sequential consumer choice processes: a quality-based choice model where consumers consider product quality first and then product type, and a type-based choice model with the reversed order. Under the quality-based model, the category manager can either adopt vertical differentiation strategy or bi-dimensional differentiation strategy, whereas under the type-based model, the category manager can either adopt horizontal differentiation strategy or bi-dimensional differentiation strategy. We characterise the structure of optimal product category and prices for each product differentiation strategy and develop efficient algorithms for the quality-based consumer choice model. We find that under the quality-based choice model, vertical differentiation strategy is more profitable than bi-dimensional differentiation strategy, whereas under the type-based choice model, horizontal differentiation strategy is preferred over bi-dimensional differentiation strategy. The result is robust considering the impact of heterogeneity in consumer choice process. Thus, further differentiation in quality or type is actually not preferred when consumers follow a sequential consumer choice process.

Return policy: Hassle‐free or your money‐back guarantee?

AbstractThis article compares the profitability of two pervasively adopted return policies—money‐back guarantee and hassle‐free policies. In our model, a seller sells to consumers with heterogeneous valuations and hassle costs. Products are subject to quality risk, and product misfit can only be observed post‐purchase. While the hassle‐free policy is cost advantageous from the seller's viewpoint, a money‐back guarantee allows the seller to fine‐tune the consumer hassle on returning the product. Thus, when the two return policies lead to the same consumer behaviors, the hassle‐free policy dominates. Conversely, a money‐back guarantee can be more profitable even if on average, high‐valuation consumers experience a lower hassle cost than the low‐valuation ones. The optimal hassle cost can be higher when product quality gets improved; thus, it is not necessarily a perfect proxy or signal of the seller's quality. We further allow the seller to adopt a mixture of these policies, and identify the concrete operating regimes within which these return policies are optimal among more flexible policies. © 2014 Wiley Periodicals, Inc. Naval Research Logistics 61: 403–417, 2014

Pricing and Operational Performance in Discretionary Services

In many services, for example, website or landscape design, the value or quality derived by a customer depends upon the service time, and this valuation differs across customers. Customers procure the service based on the expected value to be delivered, prices charged, and the timeliness of service. We investigate the performance of the optimal pricing scheme as well as two commonly used pricing schemes (fixed fee and time‐based pricing) for such services on important dimensions such as revenue, demand served, and utilization. We propose a novel model that captures the above features and wherein both service rate and demand are endogenous and functions of the pricing scheme. In particular, service time is an outcome of the pricing scheme adopted and the heterogeneous valuations of customers, unlike in the queueing‐based pricing literature. We find that the service system may benefit from a greater variance in consumer valuations, and the performance of pricing schemes is impacted by the shape of the distribution of customers' valuation of service time and the responsiveness desired by customers. Both the fixed fee and time‐based schemes do well relative to the optimal pricing scheme in terms of revenue in many plausible scenarios, but there are substantial differences between the pricing schemes in some important operational metrics. For instance, the fixed fee scheme serves more customers and has higher utilization than the time‐based scheme. We also explore variants of the fixed and time‐based schemes that have better revenue performance and show that the two‐part tariff which is a combination of fixed and time‐based pricing can do as well as the optimal scheme in terms of revenue.

Heterogeneity in Decentralized Asset Markets

We study a search and bargaining model of an asset market, where investors? heterogeneous valuations for the asset are drawn from an arbitrary distribution. Our solution technique renders the analysis fully tractable and allows us to provide a full characterization of the equilibrium, in closed-form, both in and out of steady-state. We use this characterization for two purposes. First, we establish that the model can naturally account for a number of stylized facts that have been documented in empirical studies of over-the-counter asset markets. In particular, we show that heterogeneity among market participants implies that assets are reallocated through ?intermediation chains,? ultimately producing a core-periphery trading network and non-trivial distributions of prices and trading times. Second, we show that the model generates a number of novel results that underscore the importance of heterogeneity in decentralized markets. We highlight two: First, heterogeneity magnifies the price impact of search frictions; and second, search frictions have larger effects on price levels than on price dispersion. Hence, quantifying the price discount or premium created by search frictions based on observed price dispersion can be misleading.