Duke Research Advantage

What happens when shoppers find empty spaces on store shelves instead of their preferred brands of shampoo, soda or other products?  Do they buy different brands, or remain loyal and head to another store in search of their favorite products? And can a price reduction convince shoppers to buy the product again once it is back on shelves?

These questions have challenged brand managers and store owners for ages.  Sophisticated inventory tracking systems can help reduce product outages, known as stockouts, in some retail settings.  However, these systems are not available in all retail settings, and even the best systems don’t completely eliminate stockouts.

Duke University professor Andres Musalem and co-authors have developed a new model to help managers estimate the effects of stockouts and find the best ways to recapture lost sales.

“It can be difficult for managers to know how long their products have been out of stock, and thus how many sales they may have lost,” Musalem said. “Our model can help managers overcome this lack of information and identify the best ways to mitigate lost sales.”

The team tested the model using real-world data from shampoo sales of six supermarkets in Spain. Their findings, published in the July issue of Management Science, demonstrate the value of using mathematical models and simulation methods to understand consumer responses to stockouts and to design plans to protect a retailer or a manufacturer’s revenue under situations of insufficient inventory.

In the case of shampoo purchases in Spain, Musalem found customers were likely to purchase another product in the same store when fewer than five types of products were missing from the shelf.  But when more than five products were out of stock, stores sacrificed 20% of their expected normal sales.

“A store manager could use this analysis to balance product availability with staff workloads and inventory costs,” Musalem said.  “In the case of our shampoo study, we learned that you can tolerate a certain amount of empty spaces on your shelves before restocking, but you have to be careful not to let the product selection slip to the point where sales drop precipitously.”

The model also demonstrated that discounting similar products can discourage customers from heading to another store to find their preferred product. In the shampoo example, the model indicated discounting a similar item is a good way to overcome a stockout of one particular product, but it’s better to discount an already popular product if many of a store’s brands are out of stock.

“Implementing an analysis of this type can help brand managers and retailers protect their revenues and customer loyalty,” Musalem said.

More information about the model, including the researchers’ full paper, “Structural Estimation of the Effect of Out-of-Stocks” is available here.

Let’s go through the long list that paints a picture of both short-term and longer-term risk to the economy.

1. We are not creating enough jobs to cover the growth of the population.
2. The stimulus policy is not working.
3. Consumer and business confidence is down.
4. For a large number of firms, credit conditions  have not improved since the crisis.
5. The U.S. faces Europe-like debt/GDP and deficit/GDP ratios.
6. Financial reform bill seen by many as institutionalizing the cult of bailouts.
7. Discouragement about the massive Gulf spill
8. Disappointment about the progress in Afghanistan

What about the good news? Uhhh… Maybe your favorite team advanced in the World Cup?

I have some other thoughts. Read the rest of this entry »

What single word best characterizes policy responses in this on-going financial crisis? “BAILOUT”.

It goes something like this. You take a lot of risk and reap lots of rewards (be it in pay, bonus, or social programs). You get into trouble. The government bails you out.

How often have we seen this same story repeating? It seems like we are in an infinite loop.

But we aren’t. This cannot last forever. The bailouts have many implications – some seen immediately and some will play out later.

On the positive side, bailouts buy time and short-term stability. Importantly, we see the results immediately. A good example was the big jump in world stock markets when the EU announced its 750 billion Euro bailout.

On the negative side, the list is longer. Also importantly, you do not see the results immediately. Here are a few of the implications:

1. Moral hazard. When you reward people for taking risk or going beyond their means, you will perpetuate this type of behavior in the future. That is, the cost of the bailout is not just the immediate cost but also the cost of new future bailouts that become more likely as a result of the current bailout.
2. Throwing good money at bad. We tax the productive assets to support the failed assets. Whether it is the U.S. government throwing away money on GM, Fannie or Freddy, or the German people paying for unrealistic social programs in Greece, the effect is identical. This reduces future growth opportunities in the productive economies. Think of it this way. Would you prefer to invest in a U.S. tech start up that is risky or buy some overpriced Greek assets.
3. We have to pay for it. It is naive to think that we can simply roll over debt forever. This is exactly what Greece thought. Please note that the size of the U.S. government deficit to GDP is not much different than Greece’s. [However, to be fair, the U.S. is in a much stronger starting position - but does face some similar risks.] Government debt financing competes with corporations trying to raise money. Corporations are forced to offer higher yields as more and more government debt floods the market. Increased borrowing costs means that fewer investment projects are viable. Less corporate investment leads to lower growth opportunities and lower long term growth for the economy in general. Lower growth means a smaller number of jobs.
4. Who are we really bailing out? Yes, the EU package has drastically reduced the cost to the Greek government (and other peripheral countries) of financing their debt. However, the main beneficiary are the banks and investment funds that hold the sovereign debt. They foolishly overpaid for this debt. Effectively, they thought Greek sovereign debt had the same risk as German debt. That was their mistake. However, the bailout makes them whole. That does not make any sense to me. They made a mistake and they are made whole. Remind you of AIG? Yes. It is the same thing. People that did business with AIG misestimated the “counterparty risk”. But no big deal. The government will make you whole.

I have some other thoughts.

Read the rest of this entry »

Choosing primary care over a specialty career costs physicians an estimated $2.7 million in potential lifetime earnings and wealth, according to a Duke University analysis.

The study looked at average lifetime income and wealth accumulation of specialist physicians, primary care physicians, physician assistants, MBAs and college graduates.

With 32 million more Americans about to be covered for primary care by the health care reforms, the current shortage of primary care providers may become more acute. Fixing the shortage could require policy changes to reduce this income gap, say Bryan Vaughn and Steven DeVrieze, 2009 graduates of the MBA program at Duke’s Fuqua School of Business.

The pair’s research, which began as part of a class project in Fuqua’s Health Sector Management program, will be published in the May issue of the journal Health Affairs.

Using physician income data from the American Medical Group Association and the Association of American Medical Colleges, as well as publicly reported sources of salary data for physician assistants, MBAs and college graduates, the team created a model to estimate the net present value of career wealth potential for each group. The calculation accounted for years of schooling and work, student loan debt, income and investment income potential. Salary information for cardiologists was used to represent medical specialties as a whole, with the model allowing for differences in training time and residency stipends for primary care physicians and cardiologists.

According to the model, a physician who enters medical school at age 23 and practices until age 65 would have a lifetime wealth potential of $5.2 million as a cardiologist, and $2.5 million as a family medicine or internal medicine practitioner. Average wealth potential for MBAs was $1.7 million, compared to $850,000 for physician assistants and $340,000 for college graduates. Read the rest of this entry »

When digital video recorders (DVRs) like TiVo went mainstream, advertisers assumed the devices’ fast-forward buttons would doom the traditional 30-second TV spot. Most advertisers surveyed said they planned to reduce their television ad budgets in response.

But using TiVo actually has no effect on consumers’ buying behavior, a professor at Duke University’s Fuqua School of Business has discovered. People with TiVo don’t fast-forward nearly as many ads as you might expect.

“Companies are afraid of a ‘TiVo effect’ and are changing their media spending as a result,” says Fuqua Professor Carl L. Mela. “But we find no change in people’s shopping patterns when we compare a group that has TiVo with a group that doesn’t. The manufacturers’ fears seem to be overstated.”

In partnership with Information Resources Inc. (IRI) and TiVo, Mela and colleagues from The University of Chicago and Tilburg University conducted a multimillion-dollar, three-year field study in which some households were given a DVR and their shopping behavior was compared to those without one. The authors tracked purchases of new products, advertised products and store brands across 50 categories as well as the viewing behavior of those with the DVRs.

No matter how the researchers looked at it, DVRs did not affect what people bought. This conclusion astonished the researchers.

“Our initial goal was to simply measure how bad DVRs were for advertisers,” Mela says. “We tried a vast array of methodological approaches to find a DVR effect. And we just couldn’t.”

Mela offers these factors to account for the lack of a TiVo effect:

Read the rest of this entry »

There were no evening gowns, swimsuits, or artistic talents on display, but a corporate beauty contest staged by Duke University researchers nevertheless revealed strong ties between appearance and success in the business world.

By pairing photos of the chief executive officers of large and small companies with photos of non-executives with similar facial features, hairstyles and clothing, finance professors John Graham, Campbell Harvey and Manju Puri of Duke’s Fuqua School of Business found that CEOs are more likely than non-CEOs to be rated as competent looking, but less likely to be classified as likeable.

The trio found that CEOs who appear competent earn more money than less competent-looking CEOs, even though appearance is not associated with measurable differences in company profitability.

“Other researchers have found links between beauty and workers’ pay, and demonstrated that politicians benefit from good looks at election time,” Graham said.  “We wanted to see whether appearance also plays a role at the corporate executive level.”

John Graham, Manju Puri and Cam Harvey

Read the rest of this entry »

“Only” 36,000 jobs lost in February. That is relatively good news. The storyline was the following. Given all the snow, we should have lost more jobs. 36,000 was a relatively good number because if there was no snow we would have seen growth. But we didn’t see growth. In addition, there is a lot riding on the March numbers which will be released April 2. Assuming no more snow, this argument predicts a big positive gain.

The real issue here is what the recovery will look like. Are we stuck in a quagmire of persistently high unemployment (the plank) or are we going to see a sharp rebound (the hockey stick).

I vote for the plank.

  Read the rest of this entry »

Using advanced tools to see the human brain at work, a new generation of marketing experts may be able to test a product’s appeal while it is still being designed, according to a new analysis by two researchers at Duke University and Emory University.

So-called “neuromarketing” takes the tools of modern brain science, like the functional MRI, and applies them to the somewhat abstract likes and dislikes of customer decision-making.

Though this raises the specter of marketers being able to read people’s minds (more than they already do), neuromarketing may prove to be an affordable way for marketers to gather information that was previously unobtainable, or that consumers themselves may not even be fully aware of, says Dan Ariely, the James B. Duke professor of psychology and behavioral economics at Duke.

In a perspective piece appearing online in the journal Nature Reviews Neuroscience , Ariely and Gregory S. Berns of Emory’s departments of psychiatry, economics and neuropolicy, offer tips on what to look for when hiring a neuromarketing firm, and what ethical considerations there might be for the new field. They also point to some words of caution in interpreting such data to form marketing decisions.

Neuromarketing may never be cheap enough to replace focus groups and other methods used to assess existing products and advertising, but it could have real promise in gauging the conscious and unconscious reactions of consumers in the design phase of such varied products as “food, entertainment, buildings and political candidates,” Ariely says.

“Neuromarketing: the hope and hype of neuroimaging in business,” Dan Ariely and Gregory S. Berns. Nature Reviews Neuroscience.

New work by Duke and University College London (UCL) researchers suggests that our response to disasters depends partly on the range of death tolls we are usually exposed to.

Millions of lives are lost around the world each year to accidents, terrorist attacks, wars, epidemics and natural disasters. What’s more, the prediction is that climate change will increase the number and intensity of some of these events.

Newly published research from suggests that the way people – whether members of the public or policymakers – react when faced with human fatalities is highly dependent on the distribution of death tolls they are typically exposed to.

The findings could have important implications for multi-lateral donors, national governments, aid agencies and the press in terms of planning for, fundraising for, reporting on and responding to such emergencies. Read the rest of this entry »

Risk has greatly increased this week. There are two reasons.

First, the Euro-bomb could explode anytime.

Second, the U.S. government dropped a bomb in telling us that the employment losses during the current recession are far worse than people had believed.

The Euro Bomb

The EU is in a lose-lose situation. If they rescue Greece, then other countries will have their hands out like Spain, Portugal, and Ireland. There could be others too. I doubt the main players (Germany and France) will have the stomach to bailout so many countries. The fundamental problem is that it is very difficult (near impossible) to have a currency union without a political union. While Euroland rules were established (size of deficit, government debt), they were (and are) routinely violated and there is no way to enforce – because of the lack of political union.

You create moral hazard problems. Countries will borrow and spend with the expectation that the system will bail them out. Sound familiar? If the large countries even marginally violate the rules (size of deficit, debt), then this energizes the smaller countries to brazenly violate the rules of the game.

If the EU does nothing, then the Euro will likely fall apart (or at least lose some member countries)

The real question is how deep Germany and France will want to reach into their pockets to keep the Euro going.

The Jobs Bomb

Unemployment dropped by 0.3% to 9.7%. Good news, right?

Read the rest of this entry »