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Home  Faculty and
Research   Gad Allon

Gad Allon

MANAGERIAL ECONOMICS & DECISION SCIENCES;
OPERATIONS
Associate Professor of Managerial
Economics & Decision Sciences

Overview

Vita

Research

Teaching

Gad Allon is an associate
professor of managerial economics and decision science at the Kellogg School of
Management at Northwestern University. He received his PhD in Management Science
from Columbia Business School in New York and holds a Bachelor and a Master
degree from the Israeli Institute of Technology. His research interests include
operations management in general, and service operations and operations strategy
in particular. Recently, Professor Allon has been studying models of information
sharing among firms and customers both in service and retail settings. He is
also conducting empirical studies to investigate time-based competition in the
fast food industry as well as the factors contributing to emergency department
overcrowding.

Professor Allon teaches the core operations management, an elective on
operations strategy, as well as an executive course on the "science of lean
six-sigma operations" at the Kellogg school of management. Professor Gad Allon
won the 2009 Outstanding Professor of the Year Award at Kellogg.

Areas of Expertise
Response Time
Management
Service Management

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Education
PhD, 2005, Decisions, Risk
and Operations, Columbia University

MS, 2001, Operations Research and Systems
Analysis, Technion-Israel Institute of Technology

BS, 1995, Industrial Engineering,
Management, Technion-Israel Institute of Technology, Honors

Academic Positions
Associate
Professor, Managerial Economics and Decision Sciences, Kellogg School
of Management, Northwestern University, 2009-present

Assistant Professor of Managerial Economics and
Decision Sciences, Kellogg School of Management, Northwestern
University, 2006-2009

Donald P. Jacobs Scholar in Managerial Economics and
Decision Sciences, Kellogg School of Management, Northwestern
University, 2005-2006

Editorial Positions
Associate Editor, Naval
Research Logistics, 2009-Present

Section Editor, Wiley Encyclopedia of
Operations Research and Management Science ("Retail and Service
Applications"), 2009-present

Research Interests

Operations management; service operations; supply chain model of
dual sourcing; information sharing among firms and customers; empirical studies
of service markets

Articles

Allon,
Gad, Achal
Bassamboo and Itai
Gurvich. Forthcoming. "We Will be Right with You:" Managing Customer
Expectations with Vague Promises and Cheap Talk. Operations Research.

Delay
announcements informing customers about anticipated service delays are prevalent
in service-oriented systems. How delay announcements can influence customers in
service systems is a complex problem which depends on both the dynamics of the
underlying queueing system and on the customers’ strategic behavior. We examine
this problem of information communication by considering a model in which both
the firm and the customers act strategically: the firm in choosing its delay
announcement while anticipating customer response, and the customers in
interpreting these announcements and in making the decision about when to join
the system and when to balk. We characterize the equilibrium language that
emerges between the service provider and her customers. The analysis of the
emerging equilibria provides new and interesting insights into customer-firm
information sharing. We show that even though the information provided to
customers is non-verifiable, it improves the profits of the firm and the
expected utility of the customers. The robustness of the results is illustrated
via various extensions of the model. In particular, studying models with
incomplete information on the system parameters allows us also to highlight the
role of information provision in managing customer expectations regarding the
congestion in the system. Further, the information could be as simple as “High
Congestion”/“Low Congestion” announcements, or could be as detailed as the true
state of the system.We also show that firms may choose to shade some of the
truth by using intentional vagueness to lure customers.

Allon,
Gad and Achal
Bassamboo. Forthcoming. Buying from the Babbling Retailer? The Impact of
Availability Information on Customer Behavior. Management Science.

Provision of real-time information
by a firm to its customers has become prevalent in recent years in both the
service and retail sectors. In this paper, we study a retail operations model
where customers are strategic in both their actions and in the way they
interpret information, while the retailer is strategic in the way it provides
information. This paper focuses on the ability (or the lack thereof) to
communicate unverifiable information and influence customers’ actions. We
develop a game-theoretic framework to study this type of communication and
discuss the equilibrium language emerging between the retailer and its
customers. We show that for a single-retailer and homogeneous customer
population setting, the equilibrium language that emerges carries no
information. In this sense, a single-retailer providing information on its own
cannot create any credibility with the customers. We study how the results are
impacted due to the heterogeneity of the customers. We provide conditions under
which the firm may be able to influence the customer behavior. In particular, we
show that the customers’ willingness-to-pay and willingness-to-wait cannot be
ranked in an opposite manner. However, even when the firm can influence each
customer class separately, the effective demand is not impacted.

Allon,
Gad and Achal
Bassamboo. Forthcoming. The Impact of Delaying the Delay Announcement.
Operations Research.

Many
service providers use delay announcements to inform customers of anticipated
delays. However, this information is usually not provided immediately, but
rather after a short period of time (spent either waiting or occupied by the
system). The focus of this paper is on the impact of this postponement on the
ability of the firm to communicate non-verifiable congestion information to its
customers as well as on the profits and utilities for the firm and the customers
respectively. We show that this postponement can actually help the firm create
credibility and augment the equilibrium language. However, in other settings
this delay can also detract the equilibrium language. Further, we show that
whenever credibility is created it improves not only the profit for the firm,
but also the customers’ overall utility.

Allon,
Gad and Jan
A. Van Mieghem. 2010. Global Dual Sourcing: Tailored Base Surge Allocation
to Near and Offshore Production. Management Science. 56(1): 110-124.

When
designing a sourcing strategy in practice, a key task is to determine the
average order rates placed to each source because that affects costs and
supplier management. We consider a firm that has access to a responsive
near-shore source (e.g., Mexico) and a low-cost offshore source (e.g., China).
The firm must determine an inventory sourcing policy to satisfy random demand
over time. Unfortunately, the optimal policy is too complex to allow a direct
answer to our key question. Therefore, we analyze a tailored base-surge (TBS)
sourcing policy that is simple, used in practice, and captures the classic
tradeoff between cost and responsiveness. The TBS policy replenishes at a
constant rate from the offshore source and produces at the near shore plant only
when inventory is below a target. The constant base allocation allows the
offshore facility to focus on cost efficiency while the nearshore’s quick
response capability is utilized only dynamically to guarantee high service. The
research goals are to i) determine the allocation of random demand into base and
surge capacity, ii) estimate corresponding working capital requirements, and
iii) identify and value the key drivers of dual sourcing. Given that even this
simple TBS policy is not amenable to exact analysis, we investigate a Brownian
approximation that yields a simple “square-root” formula that is insightful to
answer our questions and sufficiently accurate for practice, as is demonstrated
with a validation study.

Allon,
Gad and Itai
Gurvich. 2010. Pricing and Dimensioning Competing Large-Scale Service
Providers. Manufacturing and Service Operations Management. 12(3):
449-469.

The
literature on many-server approximations provides significant simplifications
towards the optimal capacity sizing of large-scale monopolists but falls short
of providing similar simplifications for a competitive setting in which each
firm’s decision is affected by its competitors’ actions. In this paper, we
introduce a framework that combines many-server heavy-traffic analysis with the
notion of epsilon-Nash equilibrium and apply it to the study of equilibria in a
market with multiple large-scale service providers that compete on both prices
and response times. In an analogy to fluid and diffusion approximations for
queueing systems, we introduce the notions of fluid game and diffusion game. The
proposed framework allows us to provide first-order and second-order
characterization results for the equilibria in these markets. We use our results
to provide insights into the price and service-level choices in the market and,
in particular, into the impact of the market scale on the interdependence
between these two strategic decisions.

Allon,
Gad and Awi Federgruen. 2009. Competition in Service Industries with
Segmented Markets. Management Science. 55(4)

We
develop a model for the competitive interactions in service industries where
firms cater to multiple customer classes or market segments with the help of
shared service facilities or processes, so as to exploit pooling benefits.
Different customer classes typically have distinct sensitivities to the price of
service as well as the delays encountered. In such settings firms need to
determine: (i) the prices charged to all customer classes, (ii) the waiting time
standards, i.e. expected steady-state waiting time promised to all classes,
(iii) the capacity level and (iv) a priority discipline enabling the firm to
meet the promised waiting time standards under the chosen capacity level, all in
an integrated planning model which accounts for the impact of the strategic
choices of all competing firms. We distinguish between three types of
competition: depending upon whether firms compete on the basis of their prices
only, waiting time standards only, or, on the basis of price and waiting time
standard. We establish in each of the three competition models that a Nash
equilibrium exists under minor conditions regarding the demand volumes. We
systematically compare the equilibria with those achieved when the firms service
each market segment with a dedicated service process.

Allon,
Gad and Awi Federgruen. 2008. Service Competition with General Queueing
Facilities. Operations Research. 56(4)

In many
service industries, companies compete with each other on the basis of the
waiting time their customers experience, along with the price they charge for
their service. A firm's waiting time standard may either be defined in terms of
the expected value or a given, for instance 95%, percentile of the steady state
waiting time distribution. We investigate how a service industry's competitive
behavior depends on the characteristics of the service providers' ueueing
systems. We provide a unifying approach to investigate various standard single
stage systems covering the spectrum from M/M/1 to general G/GI/s systems, along
with open Jackson networks to represent multi-stage service systems. Assuming
that the capacity cost is proportional with the service rates we refer to its
dependence on (i)the firm's demand rate and (ii) the waiting time standard as
the capacity cost function. We show that across the above broad spectrum of
queueing models, the capacity cost function belongs to a specific four parameter
class of function, either exactly or as a close approximation. We then
characterize how this capacity cost function impacts on the equilibrium behavior
in the industry. We give separate treatments to the case where the firms compete
in terms of (i) prices (only) (ii) their service level or waiting time standard
(only), (iii) simultaneously in terms of both prices and service levels. The
firms' demand rates are given by a general systems of equations of the prices
and waiting time standards in the industry.

Allon,
Gad and Awi Federgruen. 2007. Competition in Service Industries.
Operations Research. 55(1): 37-55.

We
analyze a general market for an industry of competing service facilities. Firms
differentiate themselves by their price levels and the waiting time their
customers experience, as well as different attributes not determined directly
through competition. Our model therefore assumes that the expected demand
experienced by a given firm may depend on all of the industry's price levels as
well as a (steady state) waiting time standard, which each of the firms
announces and commits itself to by proper adjustment of its capacity level. We
focus primarily on a separable specification, which, in addition is linear in
the prices. (Alternative non-separable or non-linear specifications are
discussed in the concluding section.) We define a firm's service level as the
difference between an upper bound benchmark for the waiting time standard, and
the firm's actual waiting time standard. Different types of competition and
resulting equilibrium behavior may arise, depending on the industry dynamics
through which the firms select their strategic choices. In one case, firms may
initially select their waiting time standards, followed by a selection of their
prices in a second stage (Service Level First). Alternatively, the sequence of
strategic choices may be reversed (Price First) or as a third alternative, the
firms may make their choices simultaneously (Simultaneous Competition). We model
each of the service facilities as a single server M/M/1 queueing facility, which
receives a given firm specific price for each customer served. Each firm incurs
a given cost per customer served as well as cost per unit of time proportional
to its adopted capacity level.

Allon,
Gad, Michael Beenstock, Steven Hackman, Ury Passy
and Alex Shapiro. 2007. Nonparametric Estimation of Concave Production
Technologies by Entropic Methods. Journal of Applied Econometrics. 22(4):
795-816.

An
econometric methodology is developed for nonparametric estimation of concave
production technologies. The methodology, based on the principle of maximum
likelihood, uses entropic distance and convex programming techniques to estimate
production functions.Empirical applications are presented to demonstrate the
feasibility of the methodology in small and large data sets.

Allon,
Gad, Dirk Kroese, Tal Raviv and Reuven Rubinstein. 2005.
Application of the Cross-Entropy Method to the Buffer Allocation Problem in a
Simulation-Based Environment. Annals of Operations Research. 134(1):
137-151.

The
buffer allocation problem (BAP) is a well-known difficult problem in the design
of production lines. We present a stochastic algorithm for solving the BAP,
based on the cross-entropy method, a new paradigm for stochastic optimization.
The algorithm involves the following iterative steps: (a) the generation of
buffer allocations according to a certain random mechanism, followed by (b) the
modification of this mechanism on the basis of cross-entropy minimization.
Through various numerical experiments we demonstrate the efficiency of the
proposed algorithm and show that the method can quickly generate (near-)optimal
buffer allocations for fairly large production lines.

Working Papers

Allon,
Gad and Eran Hanany. 2010. Cutting in Line: Social Norms in Queues.

While the norm in many retail banks is to serve customers on a
first-come-first-served basis, some customers try tocut the line, usually by
providing an excuse for their urgency. In other queues, however, this behavior
is considered unacceptable and is aggressively banned. In all of these cases,
customer exhibit strategies that have not yet been explored in the operations
literature: they choose whether or not to cut the line and must also decide
whether to accept or reject such intrusions by others. This paper derives
conditions for the emergence of such behavior in equilibrium among the customers
themselves, i.e. when the queue manager is not involved in granting priorities
and the customers have to use community enforcement to sustain such
equilibria.

Allon,
Gad, Sarang
Deo and Wuqin
Lin. 2010. Impact of Size and Occupancy of Hospital on the Extent of
Ambulance Diversion: Theory and Evidence.

Allon,
Gad and Awi Federgruen. Outsourcing Service Processes to a Common
Service Provider under Price and Time Competition.

In many
industries, firms consider the option of outsourcing an important service
process associated with the goods or services they bring to the market. Often,
competing firms outsource this service process to one or more common service
suppliers. When they outsource to a common service provider, this gives rise to
a service supply chain. We develop analytical models to characterize the
benefits and disadvantages of outsourcing in service industries in which the
retailers compete with each other in terms of the price they charge and/or the
waiting time expectations and standards which they adopt and sometime advertise.
To assess the benefits of outsourcing strategies, we give concrete answers to
the following questions: (i) if a service supply chain wants to operate at
maximum efficiency, what type of payment schemes does the service provider need
to offer the retailers to coordinate the chain? (ii) Given optimally
coordinating payment schemes for the outsourced service, when are firms better
off if all of them choose to outsource rather than perform the service in-house?
In addition, when will a service supply chain in which firms choose to outsource
to a common provider be stable in the sense that no firm has an incentive to
unilaterally abandon the chain and provide in-house service instead? How do the
answers to these questions depend on the type of competition, the intensity of
the competition, the number of firms in the industry and the sales volume of the
firms? (iii) How do the answers to the questions raised in (i) and (ii) depend
on whether the outside supplier pools the service processes or not and whether
it is able to operate at lower cost rates than the service retailers
themselves?

Allon,
Gad, Achal
Bassamboo and Eren Cil. Large-scale Service Marketplaces: The Role of
the Moderating Firm.

Recent
times have witnessed the emergence of large-scale, web-based service
marketplaces where many small service providers compete among themselves on
catering to customers with diverse needs. Customers who frequent these
marketplaces seek quick resolutions and thus usually trade-off prices with
waiting times. The main goal of the paper is to discuss the role of the
moderating firm in facilitating information gathering, operational efficiency,
and communication among agents. Surprisingly, operational efficiency may be
detrimental to the overall efficiency of the marketplace. Further, we show that
to reap the "expected" gains of operational efficiency, the moderating firm may
need to complement the operational efficiency by enabling communication among
its agents. The study emphasizes the large-scale of such marketplaces and the
impact it has on the outcomes.

Allon,
Gad, Awi Federgruen and Margaret Pierson. Does it pay to reduce
your customers' wait? An empirical industrial organization study of the
fast-food drive-through industry based on structural estimation methods.

In many
service industries, companies compete with each other on the basis of the
waiting time their customers’ experience, along with other strategic instruments
such as the price they charge for their service. The objective of this paper is
to conduct, what we believe to be the first, empirical study of an important
industry to test whether and to what extent waiting time performance measures
impact different firms’ market shares and price decisions.We report on a large
scale empirical industrial organization study in which the demand equations for
fast-food drive-thru restaurants in Cook County are estimated based on so-called
structural estimation methods. Our results confirm the belief expressed by
industry experts, that in the fast-food drive-thru industry customers trade off
price and waiting time. More interestingly, our estimates indicate that
consumers attribute a very high cost to the time they spend waiting.

Allon,
Gad and Assaf Zeevi. On the Relationship Between Pricing and Capacity
Decisions in Inventory Systems with Stochastic Demand.

We
address the simultaneous determination of pricing and capacity investment
strategies in a multi-period setting under demand uncertainty. In our model a
monopolistic firm makes three decisions: capacity investment (or disinvestment),
production (inventory), and price, all of which can be specified dynamically as
a function of the state of the system. We analyze the optimal joint strategy and
investigate the relationships between the main strategic decision variables:
price and capacity. We consider models that allow for either bi-directional
price changes or models with markdowns only. We show that the optimal capacity
adjustment is given by a target interval policy: there is a (state dependent)
target interval for each period such that capacity is adjusted ``as little as
possible" to bring the available level into this interval. Once the capacity
level is determined, we show that if bi-directional price changes are allowed, a
modified-base-stock list price is the optimal inventory-pricing decision. In
both cases we derive the structure of the optimal policy, and in the latter case
we prove that capacity and price are strategic substitutes.

Allon,
Gad and Achal
Bassamboo. 2007. The Role of Services: Pricing, Product Line, and
Durability.

In
recent times due to the commoditization of goods, many traditional firms often
offer services as well. In this paper, we study the role of services apart from
being another revenue source and understand how to manage services. We first
understand their role in pricing of the underlying good. Next we study the
impact of services on good variety offered by the firm. Lastly, we study the
impact of services on markets of durable goods with its specific
characteristics. We characterize the optimal behavior of the firm and relate
that to concepts of bundling and market segmentation. We show that existence of
services help firms offer a wider variety of underlying goods. Further, we show
that in the market of durable goods, offering service resolve some of key
problems such as time inconsistency.

Book Chapters

Allon,
Gad. 2009. "Pricing and Scheduling Decisions." In Wiley Encyclopedia of
Operations Research and Management Science, Hoboken, NJ: Wiley.

Allon,
Gad and Achal
Bassamboo. 2009. "Cheap Talk Applications in Service and Retail." In
Consumer-Driven Demand and Operations Management Models, edited by
Serguel Netessine and Christopher Tang, New York: Springer.

Cases

Allon,
Gad, Jan
A. Van Mieghem and Ilya Kolesov. 2010. HP Product Variety
Management. Case 5-310-511.

HP
sells configure-to-order products. With millions of part combinations going into
an order, the challenge is deciding which parts to keep in the portfolio to
balance costs with revenues. The case explains how one would approach this
problem before product introduction, but focuses on managing the existing
portfolio.

Teaching Interests
Operations management, service
operations, operations strategy

Full-Time / Part-Time MBA
Operations
Management (OPNS-430-0)

This course counts toward the following majors:Operations.

Operations management is the management of business processes--that is, the
management of the recurring activities of a firm. This course aims to
familiarize students with the problems and issues confronting operations
managers, and to provide the language, concepts, insights and tools to deal with
these issues to gain competitive advantage through operations. We examine how
different business strategies require different business processes and how
different operational capabilities allow and support different strategies to
gain competitive advantage. A process view of operations is used to analyze
different key operational dimensions such as capacity management, cycle time
management, supply chain and logistics management, and quality management.
Finally, we connect to recent developments such as lean or world-class
manufacturing, just-in-time operations, time-based competition and business
re-engineering. Prerequisite: DECS-433 or DECS-436.

Operations
Strategy (OPNS-454-0)

This course counts toward the following majors: Analytical Consulting,
Operations.

In this course, students learn how operations strategy can add value by
tailoring a set of core principles to a specific business setting. The course
provides a framework to formulate an operations strategy and analyze, value, and
optimize the key decisions involved in operations strategy. The key evaluation
metric is how operations strategy impacts the net present value of the firm. The
key decisions studied are choosing competitive operational competencies and
benchmarking; capacity expansion, timing, flexibility and location; sourcing and
contracting; risk management and operational hedging; revenue management;
improvement and learning. This course builds on the core operations class.
Students should also be familiar with the basics of finance, economics and
strategy, as the strategic decisions studied in this course require a detailed
analysis and understanding of the underlying operations. Thus this course has a
greater amount of concreteness and detail than a competitive strategy class, and
uses a combination of in-depth case analysis, mini-lectures, presentations and
qualitative discussions of other examples. The course is intended for students
interested in operations and supply chain management, general management, or
management consulting.

CONTACT INFO:
PHONE: 847-491-7422
FAX: 847-467-1220

EMAIL:
g-allon
@kellogg.northwestern.edu

OFFICE:
Jacobs
Center Room 543

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