| Six new faculty joined the Haas School in the 2002-2003
school year. Three of them, Pino Audia, Laura Kray,
and Thomas Davidoff, were featured in the previous issue
of CalBusiness. In this issue, we feature Teck Ho, John
Morgan, and Jose Silva.
Ho Draws on Chinese Philosophy for Western
Business
Trained in decision sciences, marketing professor Teck
Ho borrows from the timeless principles of Chinese philosophy
and the systematic experimentation in game theory to
illustrate how today’s managers can gain from
the strategic analysis of their own and their competitor’s
situations.
Ho joined the Haas School last fall as the William
Halford, Jr., Family Chair in Marketing. His research
focuses on strategic decision-making, retail management,
and new product development.
As Sun Tzu wrote in The Art of War 2400 years ago:
“One who knows the enemy and knows himself will
not be endangered in a hundred engagements.” Taking
the art of war to the battles of business, Ho presumes
that people who can forecast what others will do can
always beat the competition.
“To the Chinese, knowledge is the ability to
trace out or unravel a strategic situation,” says
the native Singaporean, whose work examines the application
of game theory to competitive strategy. Using a series
of simple games, Ho teaches managers about the optimal
decision-making behavior to improve firms’ decision-making
ability in competitive situations, such as price setting
and market entry. The optimal choice, he says, depends
on the individual’s best guess of others’
reasoning ability and likely action. The ability to
forecast others’ behavior can be learned, Ho has
found.
In one of Ho’s strategy games, he offers a $20
prize to the individual who can pick the number between
0 and 100 that is closest to the average number picked
by its group and then multiplied by 0.7. Ho selects
groups to comprise individuals with a similar “strategic
IQ” (based on profession and level of education),
such as a group of CEOs or a group of Ph.D. students.
Ho has found that the levels of reasoning vary across
profession, education levels, and culture. This and
similar strategic games allow Ho both to collect data
on players’ behaviors in competitive situations
and to teach managers to analyze their own strategic
options and those of their competitors.
Ho and fellow Haas professors Barbara Mellers and John
Morgan, together with Nobel Laureate George Akerlof
of the economics department, are planning to set up
a behavioral lab that will allow for the systematic
analysis of behaviors in competitive situations.
Ho is also interested in improving managerial decision-making
in retail and new product development. For example,
he studies how supermarkets set price format, determine
traffic, and manage shelf space to ultimately lead to
more traffic and more purchases. He has developed a
model drawing on consumers’ previous purchases,
price factors, features (advertising), and special displays
that has served as an effective predictor in this area.
The model helps supermarket managers to offer the right
assortment at the right price to maximize a store’s
profits.
Ho earned his undergraduate degree in electrical engineering
and a master’s degree in computer and information
science at the National University of Singapore. He
also received a master’s and a Ph.D. in decision
science from Wharton.
Morgan Tracks Peculiarities in Internet Pricing
Conventional wisdom has it that competition and transparency
made possible by the Internet will allow only low-price
firms to survive. However, John Morgan, who joined the
Haas School last fall as associate professor in Economic
Analysis & Policy, has found that price dispersion
on the web is driven more by the incentives of intermediaries—the
so-called information gatekeepers—than by the
forces of perfect competition.
Morgan has followed price dispersion trends in homogeneous
markets on the Internet since 1998, when he was assistant
professor of economics and public policy at Princeton
University’s Woodrow Wilson School. He has since
held a one-year fellowship at the Hoover Institution
at Stanford University before arriving at the Haas School
this fall.
Morgan has found that comparative shopping web sites,
such as Shopper.com, have an incentive to encourage
price dispersion in order to justify their existence.
As a result, the fee structures for the vendors who
are paying to display their products on these comparative
sites encourage price differences for identical products.
He also found that price dispersion depends on the “thickness”
of the market. That is, the more sellers in a market,
the less dispersion there is, and vice versa.
When Morgan is not studying price dispersion on the
Internet, he examines the flow of information in an
organization. “There is an increasing division
of labor between those making the decisions and those
with specialized knowledge,” says Morgan. “Designing
information flows between decision makers and experts
is obviously tremendously important in today’s
economy.”
“Balance pays,” concludes Morgan. Since
it is safe to assume that all advisors have their own
agendas or incentives, Morgan found the most effective
advisory committee to consist of two individuals with
opposite views and equally limited loyalty to the CEO.
The competition between the two creates a greater flow
of information.
If there is only one advisor, Morgan has found that
a face-to-face interaction, as opposed to a written
report, is most beneficial. The input from the decision
maker, even if he/she has no additional knowledge to
offer the advisor, creates ambiguities that encourage
greater information exchange.
In all his research Morgan has found great value in
testing economic principles in lab experiments. “Experiments
have increasingly become an important tool to evaluate
policy suggestions to solve social policy problems,
such as the selling of spectrum rights through auctions,
because economic theories have been imperfect predictors
of human behavior,” he says. “We don’t
know when we get it right and when we don’t. It
behooves theorists to test their theories in lab experiments.”
Morgan received his undergraduate degree in economics
from the Wharton School at the University of Pennsylvania
and his Master’s and Ph.D. from Pennsylvania State
University.
Silva Studies Science of Decision Making
Assistant Professor José Camões Silva
brought his expertise in behavioral economics to the
Haas School when he joined the marketing group last
fall.
Silva’s work focuses on integrating psychological
phenomena with models of decision-making and strategic
behavior. His latest research revolves around how payment
methods affect consumption of online content. An extension
of that work focuses on the willingness of individuals
to make voluntary contributions for content they like.
Silva and his co-author, Dan Ariely, former Haas assistant
professor of marketing now at MIT, found that when purchasing
content online consumers in many cases perceive the
very transaction of making a payment online as a higher
cost than the purchase price itself. In the case of
small payments, if one were to place a monetary value
on this transaction, Silva and Ariely estimated it to
be equivalent to a 47% price increase.
On the other hand, the use of electronic wallets, or
pre-payment, has the opposite effect—people who
deposit money in the wallet in advance act as if they
received a 30% price discount.
This work prompted Ariely and Silva to develop a managerial
framework for taking into account psychological phenomena
when measuring prices online.
In a separate study, Silva examined how to price content
distributed through the web and other interactive media
(e.g., compact discs with digital rights-management
encryption). Content providers face a dilemma: consumers
only know for sure what they would be willing to pay
for an article after they have read it. But, at that
point they have no incentive to pay for it—the
consumption is done and the seller cannot remove it.
Sellers have approached the problem of monetizing content
in different ways: they can sell access to the consumers
to advertisers (known as “selling eyeballs”);
they can share revenues from the broadband provider
(used by ISPs in many European countries, where local
phone service is metered); they can sell goods that
are tied in with the content provided for free (“Like
this site? Buy a T-shirt”); or, in the case of
well-established sources of information, sell the content.
Silva uses tools from behavioral economics to analyze
a fifth alternative: reliance on voluntary payments.
Many web sites now sport the “Amazon Honor System”
icon for voluntary contributions. Silva’s research
studies when each of the five approaches described above
should be used and makes managerial recommendations
based on reputation, market size, and uncertainty.
Underlying all these applications is Silva’s
award-winning original research on the foundations of
behavioral decision-making. His doctoral work at MIT
theorized on why people make inconsistent choices.
Starting with the idea that people are always trying
to do the best they can with limited mental resources,
Silva showed that many inconsistencies in decision-making
and choice are the result of people optimizing their
decisions over large groups of problems. This results
in their not being discerning enough with each individual
decision.
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