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B-School Profs Want to Know


Can we cut consumer wait time? Are there incentives for garages to cheat on auto inspections? Why does Disney World remain so expensive?

Tired of waiting? The answer may have arrived.

Three professors at the University of Toronto's Joseph L. Rotman School of Management" recently came up with a complex algorithm to help planners determine how many facilities are needed, where they should be located, and how large they should be to balance consumer wait time with budget.

While in essence standing in line for hours for everything from a cup of java to a carton of milk could come to an end, the formula, which will be published in an upcoming issue of Manufacturing & Service Operations Management, has the potential to help hospital emergency rooms, among other services, where waiting time tends to be long and can have grave consequences.

Oded Berman and his partners, Opher Baron and Dmitry Krass, sought to solve the problem using a three-pronged approach. In the algorithm, they account for the regulation of demand, the capacity vs. the waiting time, and the cost vs. the number and location of the facility. They can also modify the algorithm if the facility faces other obstacles such as politics, says Berman.

"This problem is extremely difficult," says Berman. "Our way of decomposing the problem in three ways is different from the past, and we're optimistic it will be useful."

Now the only thing planners have to wait for, adds Berman and Baron, is the publication of the paper with the algorithm.

Auto Emissions Cheating

A desire to be ever greener has some states allowing automotive repair shops to conduct safety and emissions tests on cars. But contrary to the assumption that repair shops benefit by failing cars that don't need repair, recent research suggests there's an incentive to approve cars that don't pass the emissions test.

To find out how widespread cheating is, J. Lamar Pierce, assistant professor of Strategy at "Olin Business School" at Washington University in St. Louis, and his team reviewed the data large states had collected when testing vehicles. Pierce, whose expertise includes illegal business strategies, found that the practice of passing polluter vehicles that should have failed emissions tests was widespread. In fact, he said, the Environmental Protection Agency estimates that 40% or 45% of gross polluters are still on the road. Pierce adds that nearly 50% of all pollutants in the air can be traced to automobiles, airplanes, and trucks. (One car on the road with a failing emissions grade can produce as much pollution as 300 cars that meet standards.)

Pierce's research is still undergoing peer review and has not yet been published,

What businesses can take away from this preliminary research is that financial incentives (if a car is taken off the road, its owner will not be coming in for repair work, plus the shops can offer to help bring the car up to code) combined with pressure and the culture of a shop can cause employees to cheat and pass failing cars. Individual employees can be greatly influenced by those around them. The results, says Pierce, show 60% of the change in the cheating at a person’s firm spills over to their own behavior. For example, if the new firm cheats 10% more often than the old firm, the inspector will now cheat 6% more. Also, the person with whom an employee works on a given day influences his likelihood of cheating. Those working with a straight arrow might be less likely to cheat.

Pierce says these findings offer insight into ethics and how financial incentives can influence decision making in business—and the implications don't just apply to the automotive industry. Industries at risk of falling into these ethical traps include mortgage lenders, medical workers deciding who is eligible for elective procedures, and insurers. Pierce is working on a study now that attempts to show that those who are conducting the auto emissions tests in low-income areas are more likely to help pass standard cars than luxury cars, and that the opposite is true in high-income areas.

The High Cost of Fun

Ever wonder why prices remain high at Orlando’s theme parks? You’d think that competition between the various companies—for instance, Disney (DIS) and Universal—would create a price war that would benefit consumers. That's not the case, as Seethu Seetharaman explains in a recent issue of Marketing Science.

Seetharaman, professor of marketing at the "Jones Graduate School of Management" at Rice University, found that consumers’ constant search for variety enables companies in certain markets to maintain volume despite high profit margins, and that therefore there’s no need to cut costs.

He explains: After going to one park during your week-long vacation, you want to go to another park to do something different. After all, who wants routine on vacation? Knowing most people have this desire, the parks can charge you high prices. They know eventually they’re going to get your business regardless of the price.

Seetharaman says this pricing behavior is perfectly legal because the competing companies are not teaming up to plot these practices. They’re simply making the most of their market and responding to consumer behavior. Maintaining high prices because consumers seek variety can happen in other categories, too. Seetharaman cites breakfast cereals and ice cream as other examples.

The lesson for consumers is to hide your true desires. "Keep your variety-seeking tendencies in the closet as much as possible," suggests Seetharaman. "Don’t drum it up." Or risk having to pay up for diversity.

Di Meglio is a reporter for BusinessWeek Online in Fort Lee, N.J.

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