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August 2005


Applied research: Experimental "game"
helps Ford save time, money



Customers win, too

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Experimental economics lets businesses test new ideas without risking them in the marketplace.

by Jamie Beckett

HP Labs experimental economists have helped HP improve revenue forecasting and design new incentive programs for retailers, and they've explored such questions as pricing contracts and currency fluctuations.

They've also worked with partners like Ford Motor Co. on a system its researchers developed for selling off-lease cars that were returned to dealers.

In the past, Ford shipped these cars from dealer lots to central locations to be sold at auction. After buying those cars at auctions, dealers need to ship them back to their lots.

Ford wondered what would happen if dealers could buy those cars directly on their lots without going through the auction process, saving both the time and expense required to transport cars and auction them. What would dealers pay for these cars? How would the company determine what price to charge?

Studying human behavior

Ford researcher Suzhou Huang and his team in Ford Remarketing had developed a pricing model based on the unique characteristics – factors such as the equipment included, color, usage, location and so on – of each individual vehicle.

Before implementing it, Huang wanted to test the team's assumptions about dealer behavior that were used in constructing the model. So he got together with Kay-Yut Chen, who heads HP Labs' experimental economics program, which uses laboratory experiments with human subjects to solve real business problems.

"The strength of Kay-Yut's lab is that it conducts studies on how people behave," says Irv Salmeen, manager of Ford Research's Infotronics and System Analytics Department.

Chen and Huang designed an experimental "game" that mimicked decisions car dealers had to make, tested it in Chen's lab and determined that the assumptions made by the Ford Remarketing team were correct.

Testing ideas in the lab

Ford implemented the program in 2004. Both Ford and its dealers save time and money – and consumers win with lower prices, Salmeen says.

The automaker is now exploring expanding the program to include more used cars, such as off-rental cars. Encouraged by the success of the collaboration, the team is also considering a more comprehensive optimization of the entire remarketing channel process.

Experimental economics, says Chen, lets businesses test new ideas without risking them in the marketplace.

"We call this our wind tunnel for business," he says.


Jamie Beckett is managing editor of the HP Labs Web site and a veteran newspaper reporter and editor.

Related links

» Game theory and experimental economics
» Kay-Yut Chen

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HP researcher, Kay-Yut Chen

HP researcher, Kay-Yut Chen.










 

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