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Strategic Spot Trading Benefits Some Supply Chain Participants
In industries ranging from agriculture to electronics components, manufacturers and suppliers make long-term purchasing contracts months, and sometimes years, in advance. Today spot markets also exist, where suppliers and even manufacturers with surpluses openly trade goods all over the world.
A model created by Business School researchers Haim Mendelson (at let) and Tunay Tunca shows that by strategically using both fixed-price advance contracts and open market trading, upply chain participants can create greater efficiencies, but they need to do careful analysis to determine how their decisions will affect the bottom line.
“The use of electronic markets for business-to-business trading allows participants to learn what’s going on in the marketplace in terms of supply and demand, even if they don’t have that information firsthand,” says Mendelson, the Kleiner Perkins Caufield & Byers Professor of Electronic Business and Commerce, and Management.
But there are drawbacks. “The more you trade, the more you drive the price against yourself,” says Tunca, associate professor of operations, information, and technology. Buying only on-the-spot raises the risk that you’re going to spend more than you would in a fixed-price contract made six months ago. On the other hand, you have a better idea of actual need.
What, then, is the best balance for supply chain players between long-term contracting and using the spot market? Mendelson and Tunca argue that the key is determining how liquid the spot market is in any given industry. A good spot market, they say, creates efficiencies not only in the spot market itself but also for long-term contracts.
Their model calculates a spot-market liquidity measure that incorporates demand and cost information. The study finds that markets are more liquid where consumer demands are more certain, demand forecasts are less noisy, or there are many market players. The high-end computer chip markets tend to be less liquid, for example, because sellers are relatively scarce, while the large number of buyers and sellers in the oil market make it more liquid.
In liquid markets, the researchers advise, manufacturers and suppliers should leave more of the purchasing for the open market. In industries with illiquid markets, they should do more of their purchases early through fixed-price contracts. But in all cases, both are needed: No matter how efficient electronic spot markets can be, there will likely be a role for long-term contracting.
But the good is not always good for everyone: In some markets, the spot market makes manufacturers better off at the expense of suppliers, whereas in others suppliers gain the upper hand. Supply chain participants have to analyze carefully the impact the spot market will have on their own profit.
Cross-Owners Fuel Merger
After a merger is announced the stock value of the acquiring company generally drops while that of the target firm goes up. Yet few buyer-side shareholders attempt to block mergers even in the face of such losses.
A new study by Michael Ostrovsky, assistant professor of economics, has proposed an explanation: Top shareholders in acquiring companies often break even because simultaneously they own a near equal number of shares in target firms.
Ostrovsky and Gregor Matvos, assistant professor of finance at the University of Chicago Graduate School of Business, first examined the 2003 merger of Bank of America and FleetBoston Financial that saw Bank of America’s value drop almost 10 percent in one week, producing a loss of more than $2 billion to the 10 largest B of A shareholders. In comparing the list of those shareholders against those of Fleet, however, the researchers found that 9 out of 10 names were identical, among them big companies like Fidelity, Vanguard, and Barclay’s.
The authors then looked at whether voting on mergers in the mutual fund industry also was affected by stock cross-holdings. Those who owned shares in both purchaser and target companies approved mergers 98 percent of the time. Across the board, those who owned stock only in acquiring companies lost up to 1.5 percent in value while those who owned stock in both acquiring and target firms, made a net gain of about 2.5 percent.
The numbers were even more striking for those involved in the largest 100 mergers. Acquiring shareholders lost up to 4.5 percent of the value of their holdings. Cross-holders in such instances enjoyed a modest net gain of 1 percent, but clearly their assets in the target firm had mitigated against what could have been a significant loss.
Why Retailers Shouldn’t Bury Necessities at Back of Store
That bag full of items you really didn’t intend to buy may not be completely your fault. What consumers purchase and when they buy it can actually create momentum to shop more.
Researchers including the Business School’s Uzma Khan, assistant professor of marketing; Ravi Dhar 
of Yale; and Joel Huber of Duke found that for most people buying that fateful first item seems to open the purchasing floodgates. This realization, they say, has important implications for how stores are laid out as well as understanding individual behavior.
In experiments, student subjects were allowed to purchase discounted items, in some cases a light bulb, in others an education CD that was more relevant to their needs. The more relevant the first item, the more likely they were to buy an additional unrelated item. The purchase of an initial item creates what Khan and her associates call “shopping momentum.”
Once the buying phase takes over, a subtle psychological mechanism comes into play. “People in this transition go from thinking from their mind to thinking from their cart. The cart takes over,” Khan says.
One factor that can stop the momentum is having more than one payment transaction. Subjects who had to open two envelopes to pay for items were less likely to buy. And the more the first item was perceived to be a luxury buy—with the associated guilt—the less likely people were to make a second purchase.
For marketers, the studies imply that necessities are the best drivers to get customers on a shopping roll, Khan says. Retailers should put necessities at the front of the store while the more guilt-inducing items go toward the back. They also should have fewer points of sale so customers do not have to open their wallets repeatedly.
On the customer end, the studies indicate that to resist temptation, a change in shopping strategy may be in order. “If you’re out doing gift shopping,” for example, says Khan, “buy that indulgent item for yourself first. That will curb your shopping!”
Mimicry Can Seal the Deal
Subtly imitating mannerisms and gestures of the other partner during a negotiation can lead to greater success for both parties by facilitating the building of trust and sharing of information. In one experiment 10 of 15 negotiations that included mimicry resulted in a deal, compared with only 2 of 16 without.
In the experimental settings the mimicry was so subtle that none of the subjects being mimicked was aware of it. The outcomes in cases where mimicry was used were more positive for both parties than those that lacked this element.
“Negotiators often leave considerable value on the table, mainly be-cause they feel reluctant to share information with their opponent due to their fears of exploitation,” said study authors William Maddux of INSEAD; Elizabeth Mullen, assistant professor of organizational behavior at the School; and Adam Galinsky of Northwestern.
Because negotiations typically involve the distribution of limited resources, they are fraught with incentives for competition, withholding of information, distrust, and conflict, particularly among negotiators interacting for the first time.
“Building trust and sharing information greatly increases the probability that a win–win outcome will be reached,” wrote the researchers.
Striking First Has Advantages
Making the first offer in a negotiation allows you to anchor the process, Professor Margaret Neale told a conference of nonprofit leaders in September.
The only time it makes sense to wait for the other side to make an offer, she said, is when you have information that gives you significant advantage in the bargaining or “when you honestly believe that the other side dramatically values the object of the exchange at a much higher rate than you do.”
How extreme should a first offer be? “Just this side of crazy,” Neale said, adding that you should be as aggressive as possible, but not cross the line and prompt the other side to use its greatest weapon: the ability to walk away.
However, if you can’t risk an impasse or spare the time it takes to negotiate, your first offer should be on the low side. This is also true if you want to start an auction with lower barriers to entry, she said.
Neale called negotiations “a mixed-motive interaction,” not a zero-sum game, when she spoke at the second annual Nonprofit Management Institute, cosponsored by the Stanford Social Innovation Review and the Association of Fundraising Professionals.