Impact of regulation on product rollovers

Mohammad E. A Saoud, Purdue University

Abstract

In the first chapter, we explore the effect of regulation on firms under monopolistic competition. New environmental regulations often impose stricter efficiency standards on manufacturers. The regulations impose specific cutoff dates by which manufacturers should cease production of the older version of the product and (potentially) offer new redesigned products with higher efficiencies. However, while the manufacture of the old product is banned, US regulations typically allow the continued sale of inventory in the supply chain after the cutoff date. We take the perspective of a single company, whose design choice only marginally impacts other firms in the industry (monopolistic competition). Our goal is twofold i.e., to identify the optimal design choice for the new product, and the associated inventory build up of the old product in advance of the cutoff date. We thus combine logistics considerations with new product design decisions to optimize profits. We explore the effects of product, customer and industry characteristics on the manufacturers' choices, and find that they can have significant impacts on the design decision for the new product and the inventory levels of the old product. ^ In the second chapter, we estimate the impact of environmental regulations in the US appliance industry on operational decisions and shareholder wealth. The US regulatory approach for implementing minimum energy efficiency standards is to ban the production and import but not the sale of non-conformant appliances beyond the effective date, provided that sales are from pre-existing inventory. We find significant inventory stockpiling before the effective date, with an average annual inventory growth of 15.18%. Second, we observe significant abnormal returns of -2.48% around the announcement date, and of -2.09% around the effective date, implying that significant pieces of information, related to the operational implementation of the transition, are revealed only around the effective date. Finally, we find that top performing firms have different operational strategies than low performers, resulting on average in 9.64% higher abnormal returns. This suggests that carefully managing the operational implementation of product transitions can result in important financial benefits. ^ Finally, in chapter three, we extend the study in chapter one to the case of competition. We model how competition influences a manufacturer's new product design choice under a deterministic and then a probabilistic demand model. In the first model, we propose how the characteristics of manufacturers effect the equilibrium solution i.e., design choice. Then, for the second model, we try to compare duopolist's equilibrium design to monopolist's optimal design given different customer choice models.^

Degree

Ph.D.

Advisors

Ananth V. Iyer, Purdue University.

Subject Area

Business Administration, Management|Economics, General|Operations Research

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