Hubert Pun

• Ghamat, S.; Pun, H.; Yan, X. H., (Forthcoming), "Optimal Outsourcing Strategies when Capacity is Limited", Decision Sciences.

  Abstract: Outsourcing the production of selected components to competitors is becoming more common among original brand manufacturers (OBM) however, OBMs’ increased attention to outsourcing and the growing demand in many markets can result in capacity allocation conflicts for the contract manufacturers. In this study, we consider a scenario in which the OBM decides whether to outsource to a third-party supplier or to a competitive contract manufacturer (CCM) who has the option of producing a competing product and also has limited capacity. This setting consists of two levels of competition: competition in the component market between the CCM and the spot market, and competition in the final-product market between the OBM and the CCM. The CCM first chooses the wholesale price and decides whether or not to sell a competing product to the customers. Next, the OBM decides the proportion of its component demand to outsource to the CCM, and then firms set the retail prices. We are interested to investigate the impacts of the CCM’s capacity and the impacts of these two levels of competition. We show that the OBM might multi-source its component demand only when competition in the final-product market is intense. We also find that when CCM’s capacity increases, demand may decrease while the retail price may increase. Moreover, the CCM can be worse off from having more capacity, even when CCM’s capacity is available for free. Our results also show that demand may increase when competition in the final-product market becomes more intense. Finally, we find that the value of having a third-party supplier to produce the component decreases amid the intensity of competition in the final-product market.

  Link(s) to publication:

  http://dx.doi.org/10.1111/deci.12298

• Ghamat, S.; Zaric, G. S.; Pun, H., (Forthcoming), "Contracts to promote use of optional diagnostic tests in cancer treatment", Production and Operations Management.

  Abstract: In this paper we examine performance-based payment contracts to promote the optimal use of an optional diagnostic test for newly diagnosed cancer patients. Our work is inspired by three trends: tremendous increases in the cost of new, advanced cancer drugs development of new diagnostic tests to allow physicians to tailor treatment to patients and changes in healthcare funding models that reward quality care. We model the interaction between two partiesa healthcare payer and an oncologist, in which the oncologist has private information about patients’ characteristics (adverse selection) and the payer does not know whether the oncologist takes the optimal course of action (moral hazard). We show that, in the presence of information asymmetry, a healthcare payer should never incentivize an oncologist to use a diagnostic test for all patients, even if the diagnostic test is available for free. Moreover, although the oncologist has additional information about a patient’s risk, he cannot always benefit from this private information. We also find that social welfare may not increase as a result of a decrease in the oncologist’s concerns regarding the health outcome of patients. Finally, we show that it is not always socially optimal to make a diagnostic test compulsory even if such a policy can be implemented for free.

  Link(s) to publication:

  http://dx.doi.org/10.1111/poms.12780

• Chen, J. Y.; Dimitrov, S.; Pun, H., (Forthcoming), "The impact of government subsidy on supply Chains’ sustainability innovation", Omega.

  Abstract: Motivated by recently observed industry and government practices, in this paper we endogenize government subsidy in a research joint venture (RJV). In particular, we present a three-player game in which a government determines the amount of subsidy for a supply chain consisting of a manufacturer and a retailer conducting an RJV on a sustainable product. In addition to the retail and wholesale pricing decisions, the firms must determine the level of innovation effort as well as the division of innovation costs between the partners. In our analysis we consider two forms of RJV formation (retailer and manufacturer initiated) and two types of subsidy (per-unit production subsidy and innovation effort subsidy). We find that: (a) the government should never use both types of subsidies simultaneously for any cost-reduction research and development (R&D) effort, (b) whenever effort subsidy is present the government is indifferent as to how the RJV is formed, and (c) even though firms benefit most from initiating the RJV in many cases, the manufacturer is worse off by initiating the RJV if R&D effort increases per-unit production cost, innovation or production cost is high and only per-unit production subsidy is present.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.omega.2018.06.012

• Yan, T.; Ribbink, D.; Pun, H., 2018, "Incentivizing Supplier Participation in Buyer Innovation: Experimental Evidence of Non-Optimal Contractual Behaviors", Journal of Operations Management, January 57: 36 - 53.

  Abstract: © 2017 Elsevier B.V. Original equipment manufacturers increasingly involve suppliers in new product development (NPD) projects. How companies design a contract to motivate supplier participation is an important but under-examined empirical question. Analytical studies have started to examine the optimal contract that aligns buyer-supplier incentives in joint NPD projects, but empirical evidence is scarce about the actual contracts offered by buying companies. Bridging the analytical and empirical literature, this paper compares optimal contracting derived from a parsimonious analytical model with actual behaviors observed in an experiment. In particular, we focus on how project uncertainty, buying company effort share, and buyer risk aversion influence three contractual decisions: total investment level, revenue share and fixed fee. Our results indicate significant differences between the optimal and actual behaviors. We identify various types of non-optimal contractual behaviors, which we explain from a risk aversion as well as a bounded rationality perspective. Overall, our findings contribute to the literature by showing that (1) the actual contractual behaviors could differ significantly from the optimal ones, (2) the actual contract design is sensitive to changes in project uncertainty and buying company effort share, and (3) the significant roles of risk aversion and bounded rationality in explaining the non-optimal contractual behaviors.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.jom.2017.12.001

• Chen, S-F. S.; Pun, H.; Wang, L., 2017, "A Pricing-Error Rule on Share Distribution in Equity Joint Ventures: The Bayesian Approach", Managerial and Decision Economics, December 38(8): 1172 - 1184.

  Abstract: Equity joint ventures (EJVs) are a popular governance mode of inter-firm cooperation that has attracted substantial research attention. The literature, however, still lacks a precise rule for the parents to follow in splitting the equity shares of an EJV, although share distribution is critical to almost all aspects of the co-ownership relationship. In this study, we fill this literature gap by taking the Bayesian approach to draw a pricing-error rule on share distribution in EJVs. More specifically, we contend that equity participation by two firms in an EJV allows profit sharing to correct for the errors that they might commit in pricing their inputs to the EJV. For profit sharing to fully nullify such pricing errors, the shares of an EJV must be split between the parent firms in a percentage combination that matches the relative sizes of their pricing errors. Because pricing errors are observable only afterward, share distribution in EJVs resembles a Bayesian process, in which the partners keep updating their estimates on pricing errors to adjust share distribution to a percentage combination that could best nullify their pricing errors. Thus, the eventual outcome of share adjustment is EJV buyout, in that the partner whose pricing errors remain substantial buys out the shares of the other whose pricing errors have become tolerable.

  Link(s) to publication:

  http://dx.doi.org/10.1002/mde.2855

• Pun, H.; DeYong, G. D., 2017, "Competing with Copycats when Customers Are Strategic", Manufacturing & Service Operations Management, July 19(3): 403 - 418.

  Abstract: In this paper, we use a two-period game theoretical model to examine the decisions of a manufacturer and a copycat firm who are competing for strategic customers. The manufacturer decides on the amount of its market expansion advertising investment in the first period and on its pricing strategy in both periods. Advertising increases the size of the pie, but eventually the manufacturer may end up inadvertently sharing the benefits with the copycat. After the first period, the copycat makes a market-entry decision, and, if it opts to enter, it also decides on a pricing strategy. The customers are forward-looking strategic, and they decide whether or not to buy, when to buy, and which product to buy. We find that, interestingly, lower quality levels of the manufacturer’s product may increase the manufacturer’s prices and profit. Moreover, the manufacturer may be worse off when customers are more likely to purchase its product immediately rather than wait for a price reduction or for the copycat’s product. Finally, the copycat may be worse off when customers withhold their purchases in the first period in anticipation of the possibility of copycat product becoming available in a later period.

  Link(s) to publication:

  http://dx.doi.org/10.1287/msom.2016.0613

• Begen, M. A.; Pun, H.; Yan, X. H., 2016, "Supply and Demand Uncertainty Reduction Efforts and Cost Comparison", International Journal of Production Economics, October 180: 125 - 134.

  Abstract: In industries like health care, consumer goods and agriculture, shortages are widely observed and the consequences can be costly. One of the main drivers of such shortages is the uncertain nature of supply and demand. To reduce uncertainties, sufficient information about supply and demand can be obtained by gathering relevant data (e.g., auditing suppliers and conducting market research). In this paper, we conduct an analysis to examine the impacts of supply uncertainty, demand uncertainty and uncertainty reduction efforts on production quantity and total cost. We show that in the absence of uncertainty reduction efforts, when the financial consequences of shortages are large or when the unit benefit is large, supply uncertainty is more costly than demand uncertainty. In addition, exerting supply uncertainty reduction effort always causes the firm to produce fewer units than exerting demand uncertainty reduction effort. Although supply uncertainty reduction effort delivers a larger degree of improvement to total cost (and hence, is more efficient), reduced supply uncertainty still leads to a higher system cost than does reduced demand uncertainty.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.ijpe.2016.07.013

• Pun, H.; Ghamat, S., 2016, "The Value of Partnership Under Competition: When Competitors May Be R & D Joint-Venture and Supply-Chain Partners for a Critical Component", International Journal of Production Economics, July 177: 1 - 11.

  Abstract: Conventional wisdom suggests that firms are worse off when the intensity of competition increases. However, when competitors have the option of cooperating as supply-chain and R& D joint venture (RJV) partners, the findings may be counterintuitive. In this paper, we consider two competing firms that must develop a critical component for their products. They must decide whether to develop a distinct component or to form an RJV with their competitor in order to develop a common component, and how much research effort should be exerted to improve the quality of this component. Forming an RJV partnership reduces R&D investment because both firms are jointly responsible for the research cost, but customers perceive the products to be less differentiated, thus leading to a more intense degree of competition between products. Moreover, one of the manufacturers does not produce this component and must therefore decide whether to outsource the production of this component to its competitor or to a third-party supplier. We examine the following two drivers of competition: (1) competition because the two base products are substitutable and (2) when the two firms form an RJV to develop a common component, the competition between these two products intensifies. Our main results show that both firms are better off when the competitiveness of the industry increases or when forming an RJV intensifies the competition between two products. Moreover, we investigate the robustness of our results to the firms’ bargaining powers by considering a generalized Nash bargaining game where firms negotiate on the RJV partnership decision, and we find that unless the supplier has a very large bargaining power, our results hold.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.ijpe.2016.03.018

• Pun, H., 2015, "The more the better? Optimal degree of supply-chain cooperation between competitors.", Journal of the Operational Research Society, December 12(66): 2092 - 2101.

  Abstract: We consider the outsourcing strategy problem of two competing original equipment manufacturers (OEMs) whose products are each made up of two components. The OEMs have different specializations, and therefore the component that each firm can produce in-house is different. Each firm must decide whether to outsource the other component to the competing OEM or to a third-party supplier. Prior research has demonstrated that competitors can be better off cooperating as supply-chain partners therefore, one might expect that, as long as the OEMs are not at a severe cost disadvantage, they should maximize their cooperation as supply-chain partners, especially when competition between products is strong. Interestingly, this study finds that more cooperation between competitors may actually be harmful. Under certain conditions, while one of the OEMs should outsource to the competing firm, the other should outsource to a third-party supplier, even when the third-party supplier is more expensive and the competition is intense.

  Link(s) to publication:

  http://dx.doi.org/10.1057/jors.2015.40

• DeYong, G. D.; Pun, H., 2015, "Is dishonesty the best policy? Supplier behavior in a multi-tier supply chain", International Journal of Production Economics, December 170(A): 1 - 13.

  Abstract: In this paper, we examine suppliers? dishonest behaviour in a multi-tiered supply chain. In particular, we consider a buyer purchasing a product consisting of two components from a tier-one supplier. The tier-one supplier produces one component in-house and purchases the other component from a tier-two supplier. The suppliers decide their investment in production technology, but the production technologies are imperfect, so the components may be defective. In the unfortunate situation where a defective component is produced, the seller can choose to rework the component to an acceptable standard (honesty) or may ship it without reworking (dishonesty). In turn, the buyer has the option of accepting the product as is or may conduct an inspection to identify defective components before accepting the delivery. Our results show that the buyer can benefit from either a high rework cost or when the suppliers? negative consequences from cheating are low. We also identify strategy shift-points where the changes in the players? tactics lead to rapidly changing outcomes. Finally, we examine the supply chain inefficiencies introduced by the dishonest behaviour of the suppliers.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.ijpe.2015.09.006

• Pun, H.; Heese, H. S., 2015, "A note on budget allocation for market research and advertising", International Journal of Production Economics, April 166: 85 - 89.

  Abstract: Firms that introduce new products often conduct market research to reduce the substantial uncertainty in demand. When a fixed budget is assigned to marketing-oriented activity, investments in market research must be balanced against other advertising expenses. We characterize a firm?s optimal marketing and production decisions for a new product. The larger a firm?s production cost, the higher is the cost associated with unsold products. Market research increases the forecast accuracy and thus reduces the risk of overage. As a consequence, one might expect that a firm?s investment in market research should be higher if it faces higher production costs. Interestingly we find that an increase in the production cost may sometimes lead to a decrease in the optimal investment in market research, even when the marketing budget is not restrictive.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.ijpe.2015.04.013

• Pun, H.; Heese, H. S., 2015, "Controlling a supplier’s subcontracting decisions through contractual enforcement or economic incentives", International Journal of Production Research, January 53(1): 127 - 140.

  Abstract: Suppliers often subcontract part of their workload to other suppliers, and manufacturers might suffer severe consequences if they do not anticipate their suppliers’ incentives to subcontract. In this paper, we study the case where a manufacturer outsources two tasks to a top-tier supplier. The manufacturer must decide whether it should design a contract that enforces that the different tasks are completed by the appropriate suppliers, and when it is preferable to use economic incentives to manipulate the top-tier supplier’s subcontracting behaviour. We find that when the cost difference between suppliers of different tiers is small and the correlation between the risks associated with the two tasks is minimal, the manufacturer can benefit from designing a contract that ensures the preferred subcontracting behaviour, if the cost of enforcing such a contract is not too high. However, when such enforcement cost is substantial, the manufacturer might be better off manipulating the top-tier supplier’s economic incentives.

  Link(s) to publication:

  http://dx.doi.org/10.1080/00207543.2014.939242

• Pun, H., 2014, "Supplier selection of a critical component when the production process can be improved", International Journal of Production Economics, August 154: 127 - 135.

  Abstract: In this paper, we consider the scenario where an original equipment manufacturer (OEM) has decided to outsource the production of a critical component. There are two potential suppliers: one of them is an independent supplier, while the other is a manufacturer that sells a competing product. The customers are heterogeneous in taste preferences, and the firms have products that are horizontally differentiated. Firms can perform R&D activity to improve the production process of this critical component, resulting in a larger customer value. The OEM needs to decide (1) whether to outsource the production of the component to the independent supplier or to the competitor, and (2) whether the OEM or the supplier should invest in the improvement of the production process of the component. We find that it may be optimal to outsource to the competitor and let the competitor be responsible for improving the production process, even though the competitor has the highest cost. We also find that when it is optimal to outsource the production to the independent supplier, the competitor is worse off if the OEM uses the more costly firm to improve the process.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.ijpe.2014.04.020

• Pun, H.; Heese, H. S., 2014, "Outsourcing to suppliers with unknown capabilities", European Journal of Operational Research, April 234(1): 108 - 118.

  Abstract: We investigate the make-buy decision of a manufacturer who does not know its potential suppliers’ capabilities. In order to mitigate the consequences of this limited knowledge, the manufacturer can either perform in-house or audit suppliers. An audit reveals the audited supplier’s capability such that the manufacturer can base the make-buy decision on the audit outcome the manufacturer might also learn from the audit and update its beliefs about the capabilities of the unaudited suppliers. Interestingly, using a very general model we find that the manufacturer’s decision can be independent of both the number of available suppliers and of the mechanism it uses to update its beliefs after an audit. We illustrate our general model by considering a possible application, where a manufacturer is making the outsource-audit decisions when the suppliers are more cost effective. However, when outsourcing to supplier, the manufacturer would face the uncertainty of whether or not the delivered task can integrate well with the other parts of the project.

  Link(s) to publication:

  http://dx.doi.org/10.1016/j.ejor.2013.10.068

• Pun, H., 2013, "Channel Structure Design for Complementary Products under a Co-opetitive Environment", Decision Sciences, November 44(4): 785 - 796.

  Abstract: In the high-tech industry, firms can be partners in one respect (e.g., resellers) and competitors in another. In this article, we investigate the channel structure problem for two firms-each selling competing products in two complementary marketswho are deciding whether to sell their products to customers directly or distribute one of them through a competitor. The customers are heterogeneous and both firms have products that are horizontally differentiated. When selling products directly, the firm can coordinate the prices of the two complementary products and avoid the inefficiency of double marginalization. However, selling (indirectly) through the competing manufacturer can mitigate competition because the competitor shares the profit of both competing products and therefore does not price its own products aggressively. One might expect that when the externality across the markets is strong, firms would prefer to sell both products directly (rather than through the competitor) in order to take advantage of the complementarity between markets and eliminate the inefficiency of double marginalization. Interestingly, we find that even though the first mover chooses to sell both products directly, the second mover forsakes the opportunity to coordinate the prices of its products and instead opts to distribute one of the products through the first mover.

  Link(s) to publication:

  http://dx.doi.org/10.1111/deci.12031

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