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Seminars

Equilibrium Purchasing Behavior when Operational Outcomes Impact Consumer Utility

Date: 10-24-2006
Start Time: 1:00pm
End Time: 2:30pm
Speaker: Laurens Debo, Carnegie Mellon University
Location: Uris 333

Abstract

Operations management policies are generally evaluated for exogenously given demand (or arrival rates). The implicit assumption is that consumer behavior is independent of the operational outcomes (like congestion or inventory levels). In practice, operational outcomes may impact consumer purchasing behavior. I will discuss three models in which a mutual dependence between operational outcomes and consumer purchasing behavior creates new phenomena.

The first model (joint work with B. Toktay and L. VanWassenhove) analyzes credence services, like car repair, a taxi ride in an unknown city or a lawyer’s advice. A credence service is one where the customer cannot verify, even after a purchase, whether the amount service was appropriate or not. This creates an incentive to ‘pad the service,’ that is, to prolong services without adding value to the consumer, but increasing the server’s revenues. When the service provider is busy (idling), his incentive to prolong services is weak (strong). As a result, rational consumers pay attention to the workload of the service provider when deciding whether to purchase the service or not. I will discuss the equilibrium consumer purchasing behavior for credence services.

The second model (joint work with C. Parlour and U. Rajan) analyzes the role of queues as a signal of a common, but unknown service value. Lines outside nightclubs, rides at amusement parks, visits to a crowded restaurant, and waiting lists for new products are part of everyone’s experience. If consumers are uncertain about the quality of a product or service, a queue provides credible information to later consumers about the private information of earlier arrivals. I will discuss how, in equilibrium, queue length information impacts consumer purchasing behavior.

The third model (joint work with G. van Ryzin) analyzes the role that observed inventory levels play in the consumer search process when the (common) quality of a product is unknown. Examples are new, innovative products, toys or fashion goods. Consumers may complement their incomplete assessment about the product quality with observed retailer inventory levels; low levels are considered as an indication of high demand and thus high quality. I will discuss how inventory information impacts equilibrium search and purchasing behavior.

Bio

Laurens Debo is an assistant professor of operations management and manufacturing at the Tepper School of Business at Carnegie Mellon University. He obtained his Ph.D. degree from INSEAD in 2002. His research is in the area technology and operations management. He has studied technology selection and pricing strategies for integrated management of new and remanufactured products. Recent work focuses on the operational implications of credence good characteristics of services and social learning of customers for products with uncertain, but common quality.