Department of Industrial Engineering & Decision Analytics [IEDA Seminar] - Incentive Design and Pricing under Limited Inventory

10:30am - 11:30am

A firm faces random demand for a service it delivers on a given future date. To boost demand, the firm hires a sales agent who exerts unobservable effort continuously over time. The firm is concerned not only with increasing current demand, but also with smoothing demand over time to avoid losing goodwill if realized demand exceeds available inventory. We study the firm’s incentive design problem using a novel continuous-time principal-agent framework, in which demand drifts over time in response to an agent’s unobserved effort as well as the price the firm charges. To induce the agent’s sales effort, the firm chooses an incentive scheme that depends on the remaining inventory and the time to the service (e.g., time to departure in the case of airlines). We characterize the firm’s optimal incentive scheme under both static and dynamic pricing policies. Using parameters calibrated from the airline industry, we numerically show that under dynamic pricing, using a static incentive scheme helps the firm reap nearly all the benefits of the corresponding dynamic incentive scheme. Using a fully static strategy, on the other hand, results in a significant loss of efficiency. We also compare two partially dynamic strategies in which the firm uses dynamic pricing or dynamic contracting but not both. We show that when inventory levels are high and the demand is inelastic, the dynamic-contracting-only strategy outperforms the dynamic-pricing-only strategy; when inventory levels are low and the demand is elastic, however, the dynamic-pricing-only strategy outperforms the dynamic-contracting-only strategy. 

Event Format
Speakers / Performers:
Prof. Jussi Keppo
National University of Singapore, Business School

Professor Keppo teaches risk management and analytics courses, and directs analytics executive education programs at NUS Business School. He is also the Head of the Department of Analytics & Operations at NUS Business School and Research Director of the Institute of Operations Research and Analytics at NUS. Previously, he taught at the University of Michigan.

He has several publications in the top-tier journals such as Journal of Economic Theory, Review of Economic Studies, Management Science, Operations Research, and Journal of Business on topics such as investment analysis, banking regulation, learning, and strategic incentives. His research has been featured also in numerous business and popular publications, including the Wall Street Journal and Fortune.

Professor Keppo’s research has been supported by several Asian, European, and US agencies such as the National Science Foundation. He serves on the editorial boards of Management Science, Operations Research, and Journal of Risk. He has consulted several startups, Fortune 100 companies, and financial institutions.

Recommended For
Faculty and staff
PG students
Department of Industrial Engineering & Decision Analytics
Department of Information Systems, Business Statistics & Operations Management
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