Serguei Netessine

Christian Kaps, Simone Marinesi, Serguei Netessine (2023), When Should the Off-grid Sun Shine at Night? Optimum Renewable Generation and Energy Storage Investments, Management Science.

Abstract: Globally, 1.5 billion people live off the grid, their only access to electricity often limited to operationally-expensive fossil fuel generators. Solar power has risen as a sustainable and less costly option, but its generation is variable during the day and non-existent at night. Thanks to recent technological advances, which have made large-scale electricity storage economically viable, a combination of solar generation and storage holds the promise of cheaper, greener, and more reliable off-grid power in the future. Still, it is not yet well-understood how to jointly determine optimal capacity levels for renewable generation and storage. Our work aims to shed light on this question by developing a model of strategic capacity investment in both renewable generation and storage to match demand with supply in off-grid use-cases, while relying on fossil fuel as backup. Despite the complexity of the underlying model, we are able to extract two general results. First, we find that solar capacity and storage capacity are strategic complements, except in cases with very high investment in generation capacity, when they surprisingly turn into strategic substitutes, with implications for long-term investment decisions. Second, we develop a simple heuristic to determine which storage technology, within a given portfolio, can turn a profit in the broadest set of market conditions, and thus is likely to be adopted first. We find that currently, low-efficiency, cheap technologies such as thermal can more easily turn a profit in off-grid applications than high-efficiency, expensive ones such as lithium-ion batteries. We then develop two newsvendor-like approximations of the general model that are analytically tractable, yield precise values for the optimal investment decisions and profit in some cases, and provide bounds to the optimal investment decisions and profits in all other cases. To conclude, we calibrate our models to measure the accuracy of our solutions utilizing real-life data from three geographically-diverse islands, and then use our approximations to provide high-level insights on the role that large-scale storage will play in the years ahead as technology improves, carbon taxes are levied, and solar becomes cheaper.

Jingxing (Rowena) Gan, Gerry Tsoukalas, Serguei Netessine (Under Review), Financing Platforms with Cryptocurrency: Token Retention, Sales Commission, and ICO Caps.

Abstract: Centralized platforms (e.g., Uber) rely primarily on sales commission (aka, service fees) to generate revenues whereas decentralized blockchain-based startups (e.g., Filecoin) often forego these in favor of token retention. We show that both levers help to overcome moral hazard and incentivize platform building, but they aren't perfect substitutes and imply a strategic trade-off: the commission approach generally leads to higher long-term profits for the platform founders, whereas token retention can lead to higher service levels, benefiting the service providers and users. Furthermore, the two levers also require different ICO designs when raising capital: commission works best when paired with uncapped ICOs (i.e., unlimited token supply) whereas token retention works best with capped ICOs under certain conditions. These findings offer some guidance and explanations for the operating and ICO design choices of decentralized platforms.

Jingxing (Rowena) Gan, Gerry Tsoukalas, Serguei Netessine (2020), Initial Coin Offerings, Speculation, and Asset Tokenization, Management Science, forthcoming.

Abstract: Initial Coin Offerings (ICOs) are an emerging form of fundraising for Blockchain-based startups. We examine how ICOs can be leveraged in the context of asset tokenization, whereby firms issue tokens backed by future assets (i.e., inventory) to finance growth. We (i) make suggestions on how to design such \asset-backed" ICOs---including optimal token floating and pricing for both utility and equity tokens (aka, Security Token Offerings, STOs)---taking into account moral hazard (cash diversion), product characteristics and customer demand uncertainty, (ii) make predictions on ICO success/failure, and (iii) discuss implications on rm operating strategy. We show that in unregulated environments, ICOs can lead to significant agency costs, underproduction, and loss of rm value. These inefficiencies, however, fade as product margins and demand characteristics (mean/variance) improve, and are less severe under equity (rather than utility) token issuance. Importantly, the advantage of equity tokens stems from their inherent ability to better align incentives, and thus continues to hold even absent regulation.

Description: 2019 INFORMS Section on Finance Best Student Paper Award Honorable Mention

Serguei Netessine (2019), At Your Service on the Table: Impact of Tabletop Technology on Restaurant Performance, Management Science.

Abstract: Some industries such as healthcare and financial services have reported significant productivity gains from introduction of new technologies. However, more traditional, labor-intensive industries are lagging behind. We use granular data to examine the impact of a customer-facing technology (a tabletop device that facilitates the table service process) on the check size and meal duration aspects of restaurant performance. The restaurant chain in our study implemented tabletop devices in a staggered manner, offering us a quasi-experimental setting in which to apply a difference-in-difference technique and identify the causal effect of the technology. We find that the tabletop technology is likely to improve average sales per check by 2.91% and reduce the meal duration by 9.74%, which increases the sales per minute or sales productivity by approximately 10.77%. Various robustness checks of our empirical strategy and post-hoc analyses find that efficient customers, who have lower cost of adopting new technology, generate more sales and have shorter meal duration than the inefficient customers do. Tabletop technology allows low-ability waiters to improve their performance more significantly than high-ability waiters. Overall, our results indicate great potential for introducing tabletop technology in a large service industry that currently lacks digitalization.

Marshall L. Fisher, Santiago Gallino, Serguei Netessine, Retailers Are Squandering Their Most Potent Weapons in Harvard Business Review, January - February 2019.

Abstract: Instead of viewing salespeople as an expendable cost, store managers should treat them as an asset in their battle with e-tailers.

Marshall L. Fisher, Santiago Gallino, Serguei Netessine (2018), Does Online Training Work in Retail?, M&SOM.

Abstract: A knowledgeable retail sales associate (SA) can explain the features of available product variants and give the customer sufficient confidence in her choice or suggest alternatives so that she becomes willing to purchase. Although it is plausible that increasing an SA’s product knowledge will increase sales, training is not costless and turnover is high in retail, so most retailers provide little or no training. Thus, an important question is how much, if at all, does training increase an SA’s sales productivity? To answer this question, we partnered with Experticity, a firm that provides online, self-guided training modules for retail SAs, and Dillard’s, a leading department store chain whose more than 50,000 SAs had access to the Experticity modules. We assembled a data set of the training history and sales productivity of Dillard’s associates over a two-year period. We found that as SAs engaged in training over time, their sales rate increased by 1.8 percent for every online module taken, which is a much higher benefit than the direct or indirect costs associated with this training. We also found that willingness to engage in voluntary training was an indicator of raw talent; those SAs who engaged in training were 20 percent more productive prior to any training and 46 percent more productive after training than those who took no training. Surprisingly, brand-specific training did not significantly affect the sales of the focal brand but did improve overall sales of all brands. Our evidence of successful online learning may be of general interest given that, to date, analysis of massive open online courses has shown poor engagement by participants and questionable outcomes.

Marshall L. Fisher, Santiago Gallino, Serguei Netessine (2018), Setting Retail Staffing Levels: A Methodology Validated with Implementation, .

Abstract: We describe a three-step process that a retailer can use to set retail store sales staff levels. First, use historical data on revenue and planned and actual staffing levels by store to estimate how revenue varies with the staffing level at each store. We disentangle the endogeneity between revenue and staffing levels by focusing on randomly occurring deviations between planned and actual labor. Second, using historical analysis as a guide, we validate these results by changing the staffing levels in a few test stores. Finally, we implement the results chain-wide and measure the impact. We describe the successful deployment of this process with a large specialty retailer. We find that 1) the implementation validates predictions of the historical analysis, including the use of the variation between planned staffing and actual staffing as an exogenous shock, 2) implementation in 168 stores over a 6-month period produces a 4.5% revenue increase and a nearly $7.4 million annual profit increase, after accounting for the cost of the additional labor, and 3) the impact of staffing level on revenue varies greatly by store, and therefore staffing levels should also vary, with more sales staff relative to revenue assigned to those stores where sales staff have the greatest impact on revenue. Specifically, we found the largest impact of store labor in stores with the largest average basket sizes, located in regions with good growth potential, facing certain competitors (e.g., Wal-Mart), and run by long-serving managers.

Yuqian Xu, Tom Tan, Serguei Netessine (Under Review), When Is the Root of All Evil Not Money? The Impact of Load on Operational Risk at a Commercial Bank.

Abstract: Operational risk is now among the three most significant types of risks in the financial services industry, and its management is mandated by Basel II regulation. This paper studies how bank operational risk event frequency (or error rate) and severity (potential losses) are affected by workload to inform better labor decisions. To achieve this goal, we use a unique operational risk event data set from a commercial bank in China that contains 1,441 operational risk events in two years. We find that workload has a U-shaped impact on operational risk frequency. More specifically, the error rate of operational risk events would decrease first as workload increases and then increase. In addition, we show that workload has an inverted-U shaped impact on bank profit. Based on the causal relationships between workload and operational risk events and profit, respectively, we discuss bank capital allocation impact of changing the staffing level among branches so as to reduce operational risk losses and improve profit. We compare our optimal staffing policy with bank’s original policy, and estimate that the new staffing policy would reduce the current number of employees by 7.56%, which would further decrease the number of risk events by 4.51%, cut the total losses by 4.58%, and increase profits by 1.24%.

Jun Li and Serguei Netessine (2017), Market Thickness and Matching (In)efficiency: Evidence from a Quasi-Experiment, Management Science.

Abstract: Market thickness is a key parameter that can make or break a platform’s business model. Thicker markets can offer more opportunities for participants to meet and higher chances that a potential match would exist. However, they can also be vulnerable to potential search frictions. In this paper, using data from an online peer-to-peer holiday rental platform, we aim to identify and measure the causal impact of market thickness on matching efficiencies. In particular, we exploit an exogenous shock to market size caused by a one-time migration of listings from other platforms, which gave rise to a quasi-experimental design. We find that increased market thickness actually leads to lower matching efficiency. A 1% increase in market thickness results in a 0.13% decrease in matching probability. As a result, the platform lost 4.0% of potential matches due to the increased market size. We attribute the effect to increased search friction, which is especially prominent when the matching needs to take place within limited time. Within one month before travel, each additional inquiry made by the traveler will lead to a 34.0% increase in the average quoted price and a 68.3% decrease in matching rate, whereas it has barely any effect when the travel date is more than three months ahead. Our results offer insights for future empirical and theoretical research on matching market. They also highlight the importance for platform owners to watch out for increased search frictions as markets grow and invest in technologies to facilitate more efficient search.

Jasjit Singh, Nina Teng, Serguei Netessine (2017), Philanthropic Campaigns and Customer Behavior: Field Experiments on an Online Taxi Booking Platform, Management Science.

Abstract: Firms commonly undertake philanthropic campaigns as a means of attracting and retaining customers. Such campaigns often take the form of charity-linked promotions, whereby a firm donates a specific amount to a charitable cause when a customer takes up the promotion through a related purchase. We carried out three field experiments to study such promotions in the context of an online taxi booking platform. Customers were randomly assigned to different treatment groups, which received either a charity-linked or a discount-based promotion from a range of monetary amounts. Take-up rates for charity-linked promotions were not only much smaller than for discount-based promotions but also less sensitive to the exact amount involved, consistent with a view that the decision to take up a charity-linked promotion was driven in part by a “warm glow” from mere association with giving. We also find a selection effect in promotion take-up: charity-linked promotions were disproportionately taken up by people who had already been more active customers. Although a promotion take-up does seem to represent new demand rather than mere substitution of a booking that would have occurred anyway, longitudinal data analysis reveals little evidence of a lasting treatment effect on long-term demand beyond the promotion period for either kind of promotion. Given the high cost relative to benefit for the promotional bookings themselves, this finding raises concerns regarding the prevalent practice of firms devoting significant funds for short-term promotions without rigorously examining their exact impact.