First Look

September 11, 2018

Of special interest among new research papers, case studies, articles, and books released this week by Harvard Business School faculty:

How online competition affects retail prices

With consumers comparing retail prices on the web, online competition among large retailers, including Amazon, has grown fierce. In a paper prepared for the Jackson Hole Symposium Conference Proceedings, Alberto Cavallo describes how online competition has affected the frequency of price changes, the degree of uniform pricing in various locations of the US, and overall inflation dynamics in the past decade. More Amazon Effects: Online Competition and Pricing Behaviors.

Feeding America designs marketplace for food banks

Feeding America, the third-largest nonprofit organization in the US, has designed a marketplace for distributing donated food to its broad network of food banks. Scott Duke Kominers and Alan Lam evaluate various design components that make the marketplace efficient and fair for participants in a recent case study, which also has a supplement. Feeding America (A) and Feeding America (B).

Let’s talk taxes

In a recent issue of the Economic Journal, Matthew Weinzierl takes a look at optimal taxation. Weinzierl analyzes how benefit-based taxation, in which a person’s benefit from the activities of the state is tied to his or her income-earning ability, could affect existing tax policies. Revisiting the Classical View of Benefit-Based Taxation.

A complete list of new research and publications from Harvard Business School faculty follows.

— Dina Gerdeman
 
  • August 2018
  • Journal of Accounting Research

Virtual Issue on Empirical Management Accounting Research

By: Abernethy, Margaret, and Dennis Campbell

Abstract—No abstract available.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54619

  • forthcoming
  • Jackson Hole Economic Symposium Conference Proceedings

More Amazon Effects: Online Competition and Pricing Behaviors

By: Cavallo, Alberto

Abstract—I study how online competition, with its shrinking margins, algorithmic pricing technologies, and the transparency of the web, can change the pricing behavior of large retailers in the U.S. and affect aggregate inflation dynamics. In particular, I show that in the past ten years online competition has raised both the frequency of price changes and the degree of uniform pricing across locations. These changes make retail prices more sensitive to aggregate “nationwide” shocks, increasing the pass-through of both gas prices and nominal exchange rate fluctuations.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54935

  • forthcoming
  • Consumption, Markets & Culture

Big Data

By: Deighton, John A.

Abstract—Big data is defined and distinguished from a mere moment in the “ancient quest to measure.” Specific discontinuities in the practice of information science are identified that, the paper argues, have large consequences for the social order. The infrastructure that runs on big data is described as diffusing with unprecedented speed but as being difficult to analyze and critique, and, therefore, the designers of society’s big data infrastructure, whether human or machines, play an unacknowledged legislative function of great consequence.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54683

  • forthcoming
  • Management Science

Invest in Information or Wing It? A Model of Dynamic Pricing with Seller Learning

By: Huang, Guofang, Hong Luo, and Jing Xia

Abstract—Pricing idiosyncratic products is often challenging because the seller, ex ante, lacks information about the demand for individual items. This paper develops a model of dynamic pricing for idiosyncratic products that features the optimal stopping structure and a seller that learns about item-specific demand through the selling process. The model is estimated using novel panel data of a leading used-car dealership. Policy experiments are conducted to quantify the value of the demand information that the dealer obtains through the initial assessment and subsequent learning in the selling process. With the dealer's average net profit per car in the estimation sample being around $1150, the initial assessment is worth around $101, and the subsequent learning in the selling process helps improve the dealer's profit by at least $269. These estimates suggest a potentially high return to taking the "information-based" approach to pricing idiosyncratic products.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54953

  • September 2018
  • Organizational Behavior and Human Decision Processes

When and Why Randomized Response Techniques (Fail to) Elicit the Truth

By: John, Leslie K., George Loewenstein, Alessandro Acquisti, and Joachim Vosgerau

Abstract—By adding random noise to individual responses, randomized response techniques (RRTs) are intended to enhance privacy protection and encourage honest disclosure of sensitive information. Empirical findings on their success in doing so are, however, mixed. In nine experiments, we show that the noise introduced by RRTs can make respondents concerned that innocuous responses will be interpreted as admissions, and, as a result, yield prevalence estimates that are lower than direct questioning (Studies 1–4, 5A, & 6), less accurate than direct questioning (Studies 1, 3, 4B, & 5A), and even nonsensical (i.e., negative, Studies 3–6). Studies 2A and 2B show that the paradox is eliminated when the target behavior is socially desirable, even when it is merely framed as such. Study 3 shows the paradox is driven by respondents’ concerns over response misinterpretation. A simple modification designed to reduce concerns over response misinterpretation reduces the problem (Studies 4 & 5), particularly when such concerns are heightened (Studies 5 & 6).

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54782

  • July 2018
  • Economic Journal

Revisiting the Classical View of Benefit-Based Taxation

By: Weinzierl, Matthew

Abstract—This article incorporates into modern optimal tax theory the classical logic of benefit‐based taxation in which an individual's benefit from the activities of the state is tied to his or her income‐earning ability. First‐best optimal policy is characterized analytically as depending on a few potentially estimable statistics. Constrained optimal policy, with a Pareto‐efficient objective that trades off this principle and conventional utilitarianism, is simulated using conventional constraints and methods. A wide range of optimal policy outcomes can result, including those that match well several features of existing policies. This analysis thereby contributes to the theory of positive optimal taxation.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54934

Abstract—As trust in government reaches historic lows, frustration with government performance approaches record highs. We propose that peoples’ perceptions of government and their levels of engagement with it can be reshaped and enhanced by increasing government’s operational transparency—that is, by designing service interactions so that citizens can see the often-hidden work that government performs. Across three studies, we find that revealing the “submerged state” through operational transparency impacts citizens’ attitudes and behavior. In Study 1, viewing a five-minute computer simulation highlighting the work performed by the government of an archetypal town increased trust in government and support for government services. In Study 2, residents of Boston, Massachusetts, who interacted with a website that visualized service requests (e.g., potholes and broken street lamps), and efforts by the city’s government to address them became 14% more trusting and 12% more supportive of government. Moreover, residents who additionally received transparency into the growing backlog of service requests that government was failing to fulfill were no less trusting and supportive of government than residents who received no transparency at all. Study 3 leveraged proprietary data from a mobile phone application developed by the city of Boston through which residents can submit service requests; the city’s goal was to increase engagement with the app. Users who received photos of government meeting their service requests submitted 60% more requests and in 40% more categories over the ensuing 13 months than users who did not receive such photos. These significant gains in engagement persisted for 11 months following users’ initial exposure to operational transparency and were highest for users who previously had experienced government to be moderately effective in responding to their service requests. Taken together, our results suggest that revealing the submerged state through operational transparency can shape both attitudes and behavior—results with potential implications for a broad array of service domains where operations are hidden and levels of consumer trust and engagement are faltering.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=45842

Macroeconomic Drivers of Bond and Equity Risks

By: Campbell, John Y., Carolin E. Pflueger, and Luis M. Viceira

Abstract—Our new model of consumption-based habit formation preferences generates loglinear, homoscedastic macroeconomic dynamics and time-varying risk premia on bonds and stocks. Consumers' first-order condition for the real risk-free interest rate takes the form of an exactly loglinear consumption Euler equation, commonly assumed in New Keynesian models. Estimating the model separately for 1979–2001 and 2001–2011 explains why the exposure of U.S. Treasury bonds to the stock market changed from positive to negative. A change in the comovement between inflation and the output gap explains changing bond risks but only when risk premia change endogenously as predicted by the model.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=45672

Full Substitutability

By: Hatfield, John William, Scott Duke Kominers, Alexandru Nichifor, Michael Ostrovsky, and Alexander Westkamp

Abstract—Various forms of substitutability are essential for establishing the existence of equilibria and other useful properties in diverse settings such as matching, auctions, and exchange economies with indivisible goods. We extend earlier models’ definitions of substitutability to settings in which each agent can be both a buyer in some transactions and a seller in others and show that all these definitions are equivalent. We then introduce a new class of substitutable preferences that allows us to model intermediaries with production capacity. We also prove that substitutability is preserved under economically important transformations such as trade endowments, mergers, and limited liability.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=54957

In 2018, New York Times writer Nicholas Kristof and his wife, former Times writer Sheryl WuDunn (HBS ’86) who worked in finance, were planning for their next book. The couple’s earlier books had given rise to social movements around gender equity and poverty issues. They hoped the next book would be equally powerful. What should the book focus on? What additional content should they create to make sure their writing had an impact?

Purchase this case:
https://hbsp.harvard.edu/product/418004-PDF-ENG

  • Harvard Business School Case 718-487

Matching Markets for Googlers

This case describes how Google designed and launched an internal matching market to assign individual workers with projects and managers. The case evaluates how marketplace design considerations—and several alternative staffing models—could affect the company’s goals and workers’ well-being. It discusses the details of implementation as well as the intended (and unintended) consequences of the internal match system. The case concludes with a debate about how the Chameleon marketplace could expand to include more Googlers and illustrates what to consider when thinking about launching new matching markets in organizations.

Purchase this case:
https://hbsp.harvard.edu/product/718487-PDF-ENG

  • Harvard Business School Case 818-130

Feeding America (A)

This case describes how Feeding America, the third-largest nonprofit organization in the U.S., designed a marketplace for allocating donated food across its network of food banks. It considers the promises and pitfalls of using market-based allocation in the context of a centralized artificial currency market and evaluates the importance of different design components in making the marketplace efficient and fair for all participants.

Purchase this case:
https://hbsp.harvard.edu/product/818130-PDF-ENG

  • Harvard Business School Case 818-131

Feeding America (B)

Supplements the (A) case.

Purchase this case:
https://hbsp.harvard.edu/product/818131-PDF-ENG

  • Harvard Business School Case 219-014

Arge Construction Company (B)

No abstract available.

Purchase this case:
https://hbsp.harvard.edu/product/219014-PDF-ENG

  • Harvard Business School Case 618-037

EKOL Logistics: Thinking Outside the Box

This case describes Ekol, an intermodal transportation and logistics company, and how it manages capacity planning. Its busiest routes linked motor vehicle assemblers in Germany and Turkey with many of their parts suppliers, but it had also developed key links in fast-fashion supply chains. It used combinations of land, short-sea, and rail routes to provide different levels of service. The challenge was maximizing utilization of its trucks and trailers, especially on key bottleneck links, in the face of unbalanced traffic. To address the issue Ekol developed a consolidation center in Turkey and a cross-dock deconsolidation center in Germany, its largest market. As Chairman Ahmet Musul and his team looked at ways to squeeze out more capacity, they reconsidered their planning model and whether they should build more consolidation/deconsolidation centers to optimize costs and wring out more efficiency in its operations.

Purchase this case:
https://hbsp.harvard.edu/product/618037-PDF-ENG