Three Essays on Pricing and Risk Management in Industrial Practice.

Abstract

In this dissertation, I study three types of uncertainties in industrial practice: the demand uncertainty, the earnings uncertainty and the external market uncertainty. In particular, Chapter 2 prices the demand uncertainties in the just-in-time (JIT) outsourcing between an original equipment manufacturer (OEM) and a contract manufacturer (CM) with flexible production capacity. Under this JIT outsourcing arrangement, the OEM transfers uncertain market demand to the CM without explicitly compensating the latter for the cost due to demand risks. I propose a model that prices the CM's cost of bearing this demand risk and the OEM's benefit of transferring it. I show that when the outsourcing demand is positively correlated with the either party's existing business, the higher risk it carries, the more it benefits the OEM and costs the CM. Chapter 3 proposes a model for a managed print services (MPS) provider to manage his earnings uncertainties by selecting contract terms. MPS is the unified management over institutional customers’ hardcopy device fleets. Using a proprietary dataset of Xerox, I study the optimal contracts from a risk-averse provider’s perspective. On the customer's side, I demonstrate that the customer's printing demand is insensitive to service prices. Furthermore, I show that a linear model can adequately characterize the customer's service payments. Using this linear model as an input, I build an optimization model that yields the optimal contracts that minimize the provider’s earnings variability while maximizing the expected earnings. Finally, I provide empirical evidence that the provider is better modeled as being risk-averse rather than risk-neutral. Chapter 4 aims to understand the uncertainties of the external market trends and market responses using resale prices of a particular type of used durable goods. I identify the market trends within each functionality segment, across the industry, and within each brand and OEM. I observe that the external market trends capture up to 81.4% of the volatility of an arbitrary product’s resale price, indicating strong comovements among different products. I also show there is no material impact on product resale prices due to brand termination. A big product recall, however, results in significant product price drops.