## Journal Publications

Multi-Sourcing and Miscoordination in
Supply Chain Networks, with D. Fearing and A.
Tahbaz-Salehi.

Submitted for
publication.

[abstract]
[paper]

**Abstract:**

This paper studies the endogenous formation of
supply chain networks when procurement is
subject to disruption risk. We argue that the
presence of non-convexities in the chain (e.g.,
due to non-convex production technologies or
financial constraints) may create a wedge in the
sourcing incentives of firms at different tiers,
leading to the formation of overly fragile
supply chains. More specifically, we show that
even though upstream firms may find it optimal
to employ multi-sourcing strategies as a way of
mitigating supply disruption risks, such
strategies lead to a more intertwined supply
chain, which may exacerbate the extent of risk
propagation further downstream: multi-sourcing
by upstream firms may increase the likelihood of
simultaneous disruptions in all procurement
channels available to the downstream firms. We
establish that under fairly general conditions,
the losses due to such system-wide disruptions
outweigh the benefits of multi-sourcing, thus,
implying that the endogenously formed supply
networks may be excessively interconnected.

Inventory Pooling under High
Variability, with M. G. Markakis.

Submitted for
publication.

[abstract]
[paper]

**Abstract:**

We consider a single-period, multi-location
newsvendor problem, where different
locations face independent and identically
distributed demands and linear holding and
backorder costs. It is well-known that when
demands are normally distributed,
centralized inventory management leads to
savings in expected costs that increase with
the square root of the number of locations.
Motivated by empirical evidence of
significantly higher variability compared to
that of normal distributions, e.g., in
online retailing, we revisit this classical
setting and examine the impact of high
demand variability on both the expected cost
savings and the optimal inventory levels of
centralized inventory management. For the
general class of stable distributions we
provide closed-form expressions that
characterize the benefits from inventory
pooling as a function of the number of
locations and a single parameter that
captures the variability of the underlying
demand distribution. The managerial insight
derived from our analysis is that pooling is
considerably less appealing in the case of
heavy-tailed demands and, furthermore, its
value decreases as the variability of the
underlying demand increases. This could
potentially make decentralized inventory
management preferable in certain cases.
Finally, we extend our findings to inventory
systems with service-level constraints,
e.g., in-stock probability, and discuss
their implications on the performance of
periodic-review policies, in the context of
a single-location, multi-period newsvendor
problem with fixed ordering costs.

Competing over Networks, with A.
Ozdaglar and E. Yildiz.

Submitted for publication.

[abstract]
[paper]

**Abstract:**

Recent advances in information technology
have allowed firms to gather vast amounts of
data regarding consumers' preferences and the
structure and intensity of their social
interactions. This paper examines a
game-theoretic model of competition between
firms, which can target their marketing
budgets to individuals embedded in a social
network. We provide a sharp characterization
of the optimal targeted marketing strategies
and highlight their dependence on the
underlying social network structure.
Furthermore, we identify network structures
for which the returns to targeting are
maximized, and we provide conditions under
which it is optimal for the firms to
asymmetrically target a subset of the
individuals. Finally, we provide a lower bound
on the extent of asymmetry in these asymmetric
equilibria and therefore shed light on the
effect of the network structure to the outcome
of marketing competition between firms.

Inefficient Diversification,
with A. Tahbaz-Salehi.

Submitted for publication.

[abstract]
[paper]

**Abstract:**

This paper argues that in the presence of
liquidation costs, portfolio diversification
by financial institutions may be socially
inefficient. We propose a stylized model in
which individual banks have an incentive to
diversify their risks. Yet, at the same time,
diversification may increase the aggregate
risk faced by the banks' depositors, creating
a negative externality. The increase in
systemic risk is due to the fact that even
though diversification decreases the
probability of each bank's failure, it may
increase the probability of joint failures,
which may be socially inefficient when the
depositors are risk-averse. The presence of
such externalities suggests that financial
innovations that enable banks to engineer more
diversified portfolios have non-trivial
welfare implications.

Dynamics of Information Exchange
in Endogenous Social Networks, with D.
Acemoglu and A. Ozdaglar.

To appear in Theoretical Economics.

[abstract]
[paper]

**Abstract:**

We develop a model of information exchange
through communication and investigate its
implications for information aggregation in
large societies. An *underlying state*
determines payoffs from different actions.
Agents decide which others to form a costly *communication
link* with incurring the associated
cost. After receiving a *private signal*
correlated with the underlying state, they
exchange information over the induced *communication
network* until taking an (irreversible)
action. We define *asymptotic learning*
as the fraction of agents taking the correct
action converging to one as a society grows
large.

Under truthful communication, we show that
asymptotic learning occurs if (and under some
additional conditions, also only if) in the
induced communication network most agents are
a short distance away from *information
hubs*, which receive and distribute a
large amount of information. Asymptotic
learning therefore requires information to be
aggregated in the hands of a few agents. We
also show that while truthful communication
may not always be a best response, it is an
equilibrium when the communication network
induces asymptotic learning. Moreover, we
contrast equilibrium behavior with a socially
optimal strategy profile, i.e., a profile that
maximizes aggregate welfare. We show that when
the network induces asymptotic learning,
equilibrium behavior leads to maximum
aggregate welfare, but this may not be the
case when asymptotic learning does not occur.

We then provide a systematic investigation
of what types of cost structures and
associated social cliques (consisting of
groups of individuals linked to each other at
zero cost, such as friendship networks) ensure
the emergence of communication networks that
lead to asymptotic learning. Our result shows
that societies with too many and sufficiently
large social cliques do not induce asymptotic
learning, because each social clique would
have sufficient information by itself, making
communication with others relatively
unattractive. Asymptotic learning results
either if social cliques are not too large, in
which case communication across cliques is
encouraged, or if there exist very large
cliques that act as information hubs.

Optimal Pricing in Networks with
Externalities, with O. Candogan and A.
Ozdaglar.

Operations
Research, 60(4): 883-905, July-August 2012.

[abstract]
[paper]

**Abstract:**

We study the optimal pricing strategies of a
monopolist selling a divisible good (service)
to consumers that are embedded in a social
network. A key feature of our model is that
consumers experience a (positive) *local
network effect*. In particular, each
consumer's usage level depends directly on the
usage of her *neighbors* in the social
network structure. Thus, the monopolist's
optimal pricing strategy may involve offering
discounts to certain agents, who have a *central*
position in the underlying network.

Our results can be summarized as follows.
First, we consider a setting where the
monopolist can offer individualized prices and
derive an explicit characterization of the
optimal price for each consumer as a function
of her network position. In particular, we
show that it is optimal for the monopolist to
charge each agent a price that is proportional
to her *Bonacich centrality* in the
social network. In the second part of the
paper, we discuss the optimal strategy of a
monopolist that can only choose a single
uniform price for the good and derive an
algorithm polynomial in the number of agents
to compute such a price.

Thirdly, we assume that the monopolist can
offer the good in two prices, full and
discounted, and study the problem of
determining which set of consumers should be
given the discount. We show that the problem
is NP-hard, however we provide an explicit
characterization of the set of agents that
should be offered the discounted price. Next,
we describe an approximation algorithm for
finding the optimal set of agents. We show
that if the profit is nonnegative under any
feasible price allocation, the algorithm
guarantees at least 88% of the optimal profit.
Finally, we highlight the value of network
information by comparing the profits of a
monopolist that does not take into account the
network effects when choosing her pricing
policy to those of a monopolist that uses this
information optimally.

Experimentation, Patents, and
Innovation, with D. Acemoglu and A. Ozdaglar.

*American Economic Journal: Microeconomics,
3(1): 37-77, February 2011*.

[abstract]
[paper]

**Abstract:**

This paper studies a simple model of
experimentation and innovation. Our analysis
suggests that patents improve the allocation
of resources by encouraging rapid
experimentation and efficient ex post transfer
of knowledge. Each firm receives a signal on
the success probability of a project and
decides when to experiment. Successes can be
copied. First, we assume that signal qualities
are the same. Symmetric equilibria involve
delayed and staggered experimentation, whereas
the optimal allocation never involves delays
and may involve simultaneous experimentation.
Appropriately designed patents implement the
optimal allocation. Finally, we discuss the
case when signals differ and are private
information.

Price and Capacity Competition,
with D. Acemoglu and A. Ozdaglar.*
Games and Economic Behavior, 66(1): 1-26,
May 2009. *

[abstract]
[paper]*
*

**Abstract:**

We study the efficiency of oligopoly
equilibria in a model where firms compete over
capacities and prices. Our model economy
corresponds to a two-stage game. First, firms
choose their capacity levels. Second, after the
capacity levels are observed, they set prices.
Given the capacities and prices, consumers
allocate their demands across the firms. We
establish the existence of pure strategy
oligopoly equilibria and characterize the set of
equilibria. We then investigate the efficiency
properties of these equilibria, where
"efficiency" is defined as the ratio of surplus
in equilibrium relative to the first best. We
show that efficiency in the worst oligopoly
equilibria can be arbitrarily low. However, if
the best oligopoly equilibrium is selected
(among multiple equilibria), the worst-case
efficiency loss is 2(√N-1)/(N-1) with N firms,
and this bound is tight. We also suggest a
simple way of implementing the best oligopoly
equilibrium.

## Conference papers

Optimal Pricing in the Presence
of Local Network Effects, with O. Candogan and
A. Ozdaglar,* WINE 2010.*

Forming Information Networks, *
*with D. Acemoglu and A. Ozdaglar,* **Allerton,
2010. *

Communication and Learning in
Social Networks: Partial Results, * *with
D. Acemoglu and A. Ozdaglar,* **Allerton,
2009. *

Competition with Atomic Users,
with A. Ozdaglar,* Asilomar, 2007.*

Partial Results on Capacity
Competition, with D. Acemoglu and A. Ozdaglar,*
Allerton, 2006. *