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Myong-Hun Chang
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Abstract: This paper examines the equilibrium degree of flexibility adopted by firms competing in oligopolistic product markets in which the value of flexibility arises from the initial presence of uncertainty over consumer preferences and its eventual resolution. The equilibrium choice of flexible mode depends on the following factors: (1) the cost of switching product design in response to revealed consumer preferences, (2) the difference in the acquisition costs of the flexible and dedicated modes, and (3) the precision of the ex ante information held by the firms regarding consumer preferences. The relationship between these factors and the equilibrium choice of modes is fully characterized.
"Organizational Structure and Firm Innovation in a Retail Chain"
Abstract: Two organizational structures for a retail chain are examined for their effect on the rate of firm innovation. A centralized organization is defined as one in which store practices are mandated from corporate headquarters (HQ) and this results in HQ being the sole source of new ideas. A decentralized organization gives freedom to store managers to adopt their own ideas and disseminates innovations made by store managers. The difference in average profit between the centralized and decentralized organizations is found to be a non-monotonic function of innovative opportunities. The centralized organization is preferred when innovative opportunities are moderate while the decentralized organization is preferred when such opportunities are rich. Centralization also tends to fare better in environments in which ideas are relatively complex.
"The Interactive Effect of Product Differentiation and Cost Variability on Profit"
Abstract: It is generally believed that industries with greater product differentiation have higher rates of return. This paper shows that this effect breaks down in the presence of firm-specific cost shocks. Greater substitutability in products generates two opposing effects: (1) it allows a larger increase in demand when a firm has a favorable cost shock, which more than compensates for the reduction in demand when it has an unfavorable cost shock, and (2) it results in more intense price competition. These two countervailing forces result in industry profit being highest in markets with a moderate degree of product differentiation.
"Centralization vs. Decentralization in a Multi-Unit Organization: A Computational Model of a Retail Chain as a Multi-Agent Adaptive System"
Abstract: A computational model of a retail chain is developed in which store managers continually search for better practices. Search takes place over a rugged landscape defined over the space of store practices. The main objective of this research is to determine how the amount of discretion given to store managers, as to how they run their stores, influences the rate of innovation at the store level. We find that greater decentralization enhances firm performance when stores' markets are sufficiently different, the horizon is sufficiently long, and markets are sufficiently stable.
"Chaebols and Big Deals: Cross-Market Cost-Interdependencies and the Excess Diversification Dilemma in Multi-Market Business Groups"
Abstract: This paper investigates the multi-market business groups' tendency to excessively diversify as an equilibrium phenomenon. The question of diversification is viewed as that of choosing between the focused strategy (where the firm concentrates on only one market or product) and the broad strategy (where the firm commits to more than one market). The main objective is to investigate how cross-market cost-interdependencies influence the firms' equilibrium strategies. It is found that cross-market cost-complementarities do indeed result in mutual pursuit of the broad strategy in equilibrium. However, if the cost advantage from multi-market operation is small, this equilibrium turns out to be less profitable than an alternative market configuration which entails specialization of each firm to a single (non-overlapping) market through the adoption of focused strategies. In that the firms fail to support this mutually beneficial configuration as an equilibrium, they are viewed as being confronted with the excess diversification dilemma. It is also found that the pursuit of excess diversification can exist even when diversification generates competitive disadvantages. The zone of excess diversification dilemma is identified and characterized for the case of duopoly. It is further shown that such a zone exists for a more general oligopoly.
"Decentralized Business Strategies in a Multi-Unit Firm"
Abstract: In a multi-unit firm, such as a retail chain or a multi-plant manufacturer, we compare the business strategies developed by unit managers with the strategies that maximize corporate profit. The setting is one in which units face different markets and where learning spillovers between two units are enhanced if their strategies are more similar. When there is a small number of units, we find a tendency for managers' strategies to be excessively tailored to their local market. When the firm has many units, unit strategies can be either excessively or insufficiently standardized.
"Multi-Market Competition, Consumer Search, and the Organizational Structure of Multi-Unit Firms"
Abstract: This research explores how market competition influences a firm's optimal organizational structure. For this purpose, a computational model of competing multi-unit firms is developed in which unit managers and corporate staff continually search for better practices while consumers search among units to find a better match. Organizational structure impacts both the practices at the unit level and the extent of knowledge transfer. A primary finding is that a chain should be more centralized when there is more competition.
"Organization of Innovation in a Multi-Unit Firm: Coordinating Adaptive Search on Multiple Rugged Landscapes"
Abstract: In Chang and Harrington (2000), a computational model of a multi-unit firm is developed in which unit managers continually search for better practices. Search takes place over a rugged landscape defined over the space of unit practices. There it is shown that a more centralized organization is optimal when markets are not too different and the horizon is not too long. The robustness of those results are explored here with respect to the shape of the landscape. In particular, we find that centralization does better when the search space is larger and there is a stronger correlation in a consumer's preferences across different dimensions. A richer description of comparative dynamics is also provided.
"Co-Evolution of Firms and Consumers and the Implications for Market Dominance"
Abstract: Consider a setting in which firms randomly discover new ideas that affect their products or services and implement only those ideas which increase current profit. At the same time that firms are adapting their offerings, consumers are searching among firms for the best match. It is shown that implicit in these dual dynamics is an increasing returns mechanism which can result in one firm dominating the market in the long run. The conditions under which there is sustained market dominance are characterized.
"Discovery and Diffusion of Knowledge in an Endogenous Social Network"
Abstract: We explore the evolution of the structure and performance of a social network in a population of individuals who search for local optima in diverse and dynamic task environments. Individuals choose whether to innovate or imitate and, in the latter case, from whom to learn. The probabilities of these possible actions respond to an individual's past experiences using reinforcement learning. Among some of our more interesting findings is that a population's performance is not monotonically increasing in either the reliability of the communication network or the productivity of innovation.