|
Name of Speaker
|
Chen Mingliu
|
|
Schedule
|
17 January 2025, 10am – 11.30am
|
|
Venue
|
BIZ1 03-02
|
|
Link to Register
|
|
|
Title
|
Optimal Capacity and Price Designs under Ex Ante and Ex Post Theft
|
|
Abstract
|
Internal theft poses a significant challenge in retail firms’ operations. Owing to a lack of effective monitoring tools, a firm cannot observe every action in daily operations from its employees, providing room for wrongdoings, such as capacity and cash stealing. As a result, a common practice is to increase the price of goods to offset the loss in revenue due to the increasing threat of theft. However, we show that such practices are not optimal. In this paper, we model the internal theft problem in retailing as a principal-agent model, where the principal (firm) contracts an agent (retail manager) for capacity planning and daily sales. The agent is subject to moral hazard and may steal the capacity (procurement budget or company asset) before demand realization (ex ante stealing) or steal the sales revenue after demand realization (ex post stealing). We solve for the optimal capacity, price, and agent’s commission decisions to maximize the principal’s utility. We find that capacity and price decisions are not monotone in terms of the severity of moral hazards. In particular, the principal should first decrease and then increase (increase and then decrease) the price (the capacity) when ex post stealing becomes more prevalent. As a result, simply increasing retail prices and shifting the margin to consumers to combat loss in revenue caused by internal theft can amplify the agency problem in some scenarios since it leads to a significant loss in demand and insufficient commission to the agent. Retail firms should instead focus on jointly optimizing capacity and price and providing their employees with appropriate commissions. Finally, we investigate the sensitivities of price and capacity decisions to demand uncertainties in the presence of moral hazard.
|
|
About the Speaker
|
Mingliu Chen is an Assistant Professor in Operations Management at Jindal School of Management, the University of Texas at Dallas. He is interested in applying analytical and modeling techniques in market and mechanism design issues. He has contributed to the literature on contract designs and developed novel models describing problems in the sharing economy and online matching platforms. Recently, his research focused on design problems in some emerging markets and the interface between contracting theory and operations.
|
