Vertical ties High-technology markets, innovation

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1 Madhu Viswanathan Ph.D. Candidate in Marketing University of Minnesota, Carlson School of Management th Avenue South, Ste 3-150, Minneapolis, MN (952) EDUCATION Ph.D. in Business Administration (Major: Marketing), Expected 2012 University of Minnesota, Carlson School of Management, Minneapolis, MN B.E (Hons.) Mechanical Engineering, June 2002 Birla Institute of Technology and Science, Pilani, India. RESEARCH INTERESTS I am interested in the nature of inter-firm relationships and their effect on various marketing mix elements such as prices and promotions. I have studied questions related to this theme in a variety of industries, such as digital TVs and grocery retail. I am an empiricist who uses various econometric techniques, with a particular emphasis on structural econometric models to examine these issues. My interests can be broadly classified into the following areas: Structural models, Empirical Industrial Organization Vertical ties High-technology markets, innovation DISSERTATION Economics of Vertical Ties Dissertation Advisors: George John & Om Narasimhan Committee Members: Mark Bergen & Amil Petrin (Economics) Essay 1 - The Economic Impact of Category Captaincy: An Examination of Assortments and Prices [Job Market Paper] Vertical arrangements like Category Captaincy and Slotting fees involve transactions on both price and non-price aspects (such as shelf-space allocations and assortments etc.) and are becoming increasingly popular in retail markets. Given the financial scope and magnitude of the retail sector, such arrangements can have a disproportionately large impact on consumers and on the competitive landscape. Not surprisingly, they have been the subject of much scrutiny from industry practitioners and public policy experts (Desrochers et al. 2003). However, empirical work concerning these practices has been hampered by i) the difficulty of obtaining detailed data on these arrangements, and ii) the difficulty of developing models that can examine both price and non-price aspects of these arrangements, while accounting for horizontal competition between manufacturers and vertical interactions between manufacturers and retailers. In this essay, I attempt to address the challenges mentioned above in the context of Category Captaincy, an arrangement where the retailer works exclusively with a manufacturer to manage both the manufacturer s and his rivals products, and its impact on assortments and prices. I develop an empirical model of demand and supply to model assortment decisions under category captaincy. I use a unique dataset from the frozen pizza category that contains information on category captaincy across 20 retail chains and 5 local markets in the United States, in addition to retail movement data. 1

2 I discuss three potential welfare effects that occur under category captaincy. An efficiency effect occurs if captaincy lowers upfront cost per SKU compared to the retailer managing the category. A marketcoverage effect occurs if captaincy leads to the addition of SKUs that a retailer would not have otherwise carried. Finally, a substitution effect occurs if captaincy leads to a rival s SKUs being dropped from the assortment carried. Together, these effects determine the products available to the consumers under captaincy arrangements. My estimates point to an efficiency effect; on average, captaincy leads to savings of $2400 per SKU per quarter for a retail chain. Further, I document evidence for market-coverage and substitution effects showing that captaincy leads to addition and/or deletion of SKUs that favor category captains and retailers at the expense of rival manufacturers. Interestingly, captaincy can also lead to welfare gains for consumers, which argues against a purely negative view of captaincy by policy makers. Essay 2 The Role of Tie Multiplexity: Bigger Share or Bigger Pie Professional services markets are frequently characterized by suppliers positioning themselves as onestop destinations and selling multiple services to buyers; i.e. they strive to establish multiplex ties. While extant theory on relationships points to gains from multiplex ties, and some limited empirical work appears to verify these conjectures, the analyses to date are silent about the costs of such ties. Put simply, absent such costs, why do all ties not move quickly to multiplex forms? Indeed, the reverse is the case, with multiplex ties being quite scarce. I posit that multiplex ties undermine the supplier s ability to appropriate value created. In this paper, I empirically examine the determinants of the tradeoff between the value created and value appropriated in multiplex ties. In particular, I explore how a firm s portfolio of ties affects its gains from exchange relationships. My methodology specifically capitalizes on the twosided matching between buyers and sellers to identify the determinants of tie formation and to recover the division of rents. To do this, I use a unique dataset on ties between large corporate clients and law firms in the United States from 2001 to I adapt an inequalities estimator developed by Pakes, Porter, Ho and Ishii (2006) to my specific problem by modeling a law firm s choice of relationship ties in a two-stage process conditional on its expectations regarding other law firms choices and the prices demanded by corporate clients. My approach allows me to infer the division of profits that accrue from the different ties formed by a firm. WORKING PAPERS (Copies available) 1. Viswanathan Madhu, Prokriti Mukherji, Om Narasimhan and Rajesh Chandy, The Big Picture: Exploring the Performance Impact of being at the Technological Frontier Under review at Management Science 2. Viswanathan Madhu, Economic Impact of Category Captaincy: An Examination of Assortments and Prices 3. Viswanathan Madhu, Tony Cui, Mrinal Ghosh and George John, Loss-Averse Reference Dependent Contract Choices: Evidence from Sales Force Compensation SELECTED RESEARCH IN PROGRESS Viswanathan Madhu, Ranjan Banerjee and Om Narasimhan, Studying the Switching Behavior of Electricians: Assessing the Impact of Loyalty Programs 2

3 CONFERENCE PRESENTATIONS Studying the Switching Behavior of Electricians: Assessing the Impact of Loyalty Programs, Marketing Science Conference, Rice University, June 2011 The Big Picture: Exploring the Performance Impact of being at the Technological Frontier, Marketing Science Conference, University of Cologne, June 2010 Loss-Averse Reference Dependent Contract Choices: Evidence from Sales Force Compensation, Marketing Science Conference, University of Michigan, June 2009 The Big Picture: Exploring the Performance Impact of being at the Technological Frontier, Frontiers of Research in Marketing Conference, University of Texas at Dallas, February 2009 HONORS AND AWARDS ISBM Doctoral Consortium Representative, Harvard Business School, 2010 Haring Symposium Representative, Indiana University, 2009 Doctoral Internationalization Consortium in Marketing Representative, University of Texas, Austin, 2008 Henrickson Fellowship, Carlson School of Management, University of Minnesota, 2008 TEACHING EXPERIENCE Instructor, Marketing Research Undergraduate Course, Carlson School of Management, Fall Teaching evaluation: 5.14/6.0 Teaching Assistant, Principles of Marketing Undergraduate Course, Carlson School of Management, Fall Teaching Assistant, Marketing Research MBA Course, Carlson School of Management, Spring 2009 and 2010 Teaching Assistant, Buyer Behavior Undergraduate Course, Carlson School of Management, Spring 2010 Teaching Assistant, Marketing Strategy Executive MBA Course, Carlson School of Management, Fall 2011 (in preparation). TEACHING INTERESTS Marketing Research Marketing Strategy Sales Management Pricing New Products Channels of Distribution INDUSTRY EXPERIENCE Software Consultant, Infosys Technologies (supply chain planning), Bangalore, India, Design Engineer, Bluechip Amusements, Chennai, India,

4 DOCTORAL COURSEWORK Marketing Seminars (Semester Length Classes) Marketing Management and Strategy Inter-Organizational Relations Marketing Models Theory and Methods of Measurement Consumer Behavior Experimental Research Methods Economics (Half-Semester Classes) Microeconomics I Microeconomics II Microeconomics III Microeconomics IV Applied Econometrics I Applied Econometrics II Econometrics-I Econometrics-II Industrial Organization-I Industrial Organization-II Industrial Organization-III Industrial Organization-Workshop Industrial Organization-Workshop Applied Macroeconomics Statistics (Semester Length Classes) Probability Models for Biostatistics Numerical Analysis and Scientific Computing Rajesh Chandy George John Om Narasimhan Akshay Rao Joan Myers-Levy Deborah Roedder John Jan Werner Beth Allen Aldo Rustichini Aldo Rustichini Patrick Bajari Erzo Luttmer Amil Petrin Kyoo Il Kim Tom Holmes Minjung Park Patrick Bajari Amil Petrin Patrick Bajari Rodney Smith Sudipto Banarjee Mitchell Luskin 4

5 REFERENCES Professor George John General Mills Gerot Chair in Marketing University of Minnesota Carlson School of Management th Avenue South, Ste Minneapolis, MN Phone: (612) Professor Om Narasimhan Board of Overseers Professor of Marketing University of Minnesota Carlson School of Management th Avenue South, Ste Minneapolis, MN Phone: (612) Professor Mark E. Bergen James D. Watkins Chair in Marketing University of Minnesota Carlson School of Management th Avenue South, Ste Minneapolis, MN Phone: (612) Professor Rajesh Chandy Tony and Maureen Wheeler Chair in Entrepreneurship London Business School Regent s Park London, United Kingdom NWI 4SA Phone: rchandy@london.edu 5

6 APPENDIX Abstracts for Working Papers Viswanathan Madhu, Prokriti Mukherji, Om Narasimhan and Rajesh Chandy, The Big Picture: Exploring the Performance Impact of being at the Technological Frontier We seek to answer two inter-related questions about firms in technologically complex environments. First, what are the benefits to a firm of offering products at the technological frontier? Second, to what extent does outsourcing production influence the ability of a firm to offer products at the technological frontier within an industry? To answer these questions, we have assembled a panel dataset in the flat panel television industry that includes unique details about the products offered by all major manufacturers in the industry across major markets in the world. Specifically, the data covers details of technology, size, brand, region and time, for both Plasma and LCD TVs across North America, Japan, and Europe. We employ a structural econometric approach. On the demand side, we find that being on the technology frontier leads to positive spillover effects. On the supply side, outsourcing leads to significant cost advantages but also decreases the ability to be on the frontier. Finally, applying our structural econometric model to the data, we are able to do counterfactual analyses to test the performance impact of potential changes in vertical structure for each firm. Viswanathan Madhu, Tony Cui, Mrinal Ghosh and George John, Loss-Averse Reference Dependent Contract Choices: Evidence from Sales Force Compensation The paper develops and estimates a contract choice model with reference dependent loss-averse principals and agents. The novelty here is the first empirical implementation of the Köszegi and Rabin (2006) endogenous reference point approach, which has been discussed as a leading candidate model to explain the widespread observed distaste for risk, in place of expected utility theory, which relies on maximization of a concave wealth function. Our data are from a laboratory setting with randomly assigned principal-agent dyads, where each principal offers their agent one of three compensation contracts, and the latter chooses one of three effort responses. We develop statistical estimates of the model s key parameters by incorporating errors-in-decisions from a quantal response equilibrium approach. Our estimates reveal significant reference point effects on contract choice, and loss-averse agents and principals (λ estimates of 2.7 and 3.1 respectively). Compared to the baseline agency model, our reference dependent loss-averse model recovers more observed contract offers (75% versus 31%). We discuss the ramifications of these results for theory and methodology. 6