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Strategic Models in Supply Network Design

Roger Lederman, 2012
Faculty Advisor: Nicolas Stier-Moses


This dissertation contains a series of essays intended to introduce strategic modeling techniques into the network design problem. While investment in production capacity has long been approached as a critical strategic decision, the increasing need for robust, responsive supply capabilities has made it essential to take a network view, where multiple products and sites are considered simultaneously. In traditional network planning, models have rarely accounted for the behavior of additional players -- customers, competitors, suppliers -- on whom a firm can exert only a limited influence. We analyze a set of models that account for the dynamics of the firm's interaction with these outside actors.

In Chapters 2 and 3, we develop game-theoretic models to characterize the allocation of resources in a network context. In Chapter 2, we use series-parallel networks to model the arrangement of producers whose output is bundled. This structure may arise, for example, when various components of the production process are outsourced individually. We study supply-function mechanisms through which producers strategically manage scarce capacity. Our results show how network structure can be analyzed to measure producers' market power and its effect on equilibrium markups. Chapter 3 looks at the network design problem of a vertically integrated firm with the ability to flexibly allocate resources across markets. We consider optimal design of the firm's production network as an upper-level decision to be optimized with respect to competitive outcomes in the lower stage. We find that optimal strategies regarding the location and centralization of production will differ across firms, depending on their competitive position in the market.

The final two chapters discuss practical issues regarding the availability of model inputs in a multi-product context. In Chapter 4, we propose a method to construct competitor sets through estimation of a latent-segment choice model. We present a case study in a hotel market, where demand is distributed both spatially and temporally. We show how widely available data on market events can be used to drive identification of customer segments, providing a basis to assess competitive interactions. Chapter 5 provides a further example, in the setting of urban transportation networks, of how user behavior on a network can be estimated from partially observed data. We present a novel two-phase approach for performing this estimation in real time.

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