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Business modelling is a vast arena of research and practice, which is gaining increasing important in the rapid development of e-commerce, globalization, and in particular, the movement toward global e-business. The ability to utilize advanced computing technology to model, analyse and simulate various aspects of ever-changing businesses has made a significant impact on the way businesses are designed and run these days. With the current global e-business and e-commerce initiatives, it has become important that all businesses carefully validate their business objectives, requirements, and strategies through a careful process of formal business modelling. It is important for effective enterprise decision making to have clear, concise business models that allow the extraction of critical value from business processes and specify the rules to be globally enforced. Particularly in e-business specifications, the need to be unambiguous, accurate, and complete becomes even greater, because there may be no human mediator or agent to rely on in complex or unforeseen situations.
Business Modelling: Multidisciplinary Approaches - Economics, Operational, and Information Systems Perspectives, arranged in three parts, brings scholarly perspectives from various disciplines to bear on some of the critical aspects of business modeling. The first part (chapters 1-8) focuses on business modelling fundamentals and starts with a series of economics and operations research perspectives. The second part (chapters 9-19) concentrates on modelling in electronic businesses and focuses on Management Information Systems and Decision Support Systems. The third part (chapters 20-22) centers on multidisciplinary business modelling progress, in particular on the seminal work of Professor Andrew B. Whinston.



Business Modelling Fundamentals



Business Modelling: MultiDisciplinary Approaches Essays in Honor of Andrew B. Whinston
Business modelling is a vast arena of research and practice, which has taken on considerable importance over the past few decades. The ability to utilize advanced computing technology to model, analyse and simulate various aspects of ever-changing businesses has made a significant impact on the way businesses are designed and run these days. This book is a festschrift to Professor Andrew B. Whinston (currently Hugh Roy Cullen Centennial Chair in Business Administration at the University of Texas, Austin and formerly a faculty member at Purdue University, University of Virginia and Yale University), a pioneer in business modelling, who has inspired many multi-disciplinary approaches to problem solving in the business environment.
Clyde Holsapple, Varghese Jacob, H. Raghav Rao, Abhijit Chaudhury, Manish Agrawal

Chapter 1. Gleanings into the Second Best Debate

The theory of the second best was a major topic of interest and concern in the field of economics beginning in the late 1950s and extending all the way to the present. Stimulated by observations made by Paul Samuelson in his Foundations of Economic Analysis (1947) and formalized by Lipsey and Lancaster (1956), the theory represented a formidable challenge to the accepted model of free enterprise and perfect competition. It concluded that if even just one sector of the economy did not act in the way described by the perfectly competitive model, and thus the first best solution was not being attained, then it was possible that the “second best” solution would require that no sector act in the manner prescribed in the perfectly competitive environment. In addition, due to the complexity of the second best requirements, it would be very unlikely that even the second best solution, or “third best,” etc., solutions could be attained in real world applications. However, a combination of discovery and insights by Negishi (1960) and Davis and Whinston (1965) redeemed the virtues of the laissez faire principle. In this paper the author attempts to clarify the original and most important controversy surrounding the theory of the second best
William A. Hamlen

Chapter 2. Transfer Pricing

From price guidelines to strategic interaction
The most well-established rule for transfer pricing is that the transfer price should be equal to marginal costs, in order to maximize total profits. This paper shows that, in oligopolistic markets where firms face strategic interactions, profit maximizing firms have incentives to deviate from the price equal to marginal cost rule and that the sign of the deviation depends upon the structural conditions of the market, such as homogeneous or differentiated products and price or quantity competition.
Vicente Salas-Fumas, Francisco Ruiz-Aliseda

Chapter 3. Trading Mechanism Design for Swap Markets

This paper proposes an electronic market for swap exchange. We have designed a trading mechanism that allows multiple swaps, futures and forwards to be traded on the same market and guarantee that traders will get either the combination of assets or nothing.
Ming Fan, Xiaorui Hu, Han Zhang

Chapter 4. Production Capacity for Durable Goods

A theory of manufacturing capacity choice for a durable good is provided. The remarkable conclusion is that efficient production may entail ten to fifty years before full market saturation is reached. The time to market saturation is increased as the good becomes less durable, and the size of the crash when saturation is reached falls as the durability decreases. The monopoly seller is efficient provided he doesn’t ever undercut himself, a feature of some equilibria of the “no gap” case, where demand intersects marginal costs.
R. Preston McAfee

Chapter 5. Cost-Sharing For Pollution Abatement

An Informationally Decentralized Coordination Process
This paper presents a method of ameliorating externality problems when polluters and sufferers would like to take a cooperative approach, sharing costs of abatement and jointly deciding expenditure for abatement and environmental goals. The method for solving this joint problem uses decentralized messages among the involved participants concerning willingness to pay and proposals about environmental quality. The iterative process starts from exogenously specified cost shares that are then adjusted through personalized prices (which can be taxes or subsidies). The process arrives at equilibrium through price adjustment rules. The equilibrium of the process satisfies social efficiency by design. A simulated example shows that the method can solve a complex problem in a relatively few iterations.
Edna T. Loehman, Rabih Karaky

Chapter 6. A Study on Coefficient Reduction of Binary Knapsack Inequalities

In 1975, Bradley, Hammer and Wolsey characterized the minimal representation of binary knapsack problems. A linear programming formulation for this problem often gave integral solutions leading the authors to state “We know of no satisfactory explanation of why the large fraction of linear programming optimal solutions are integer for this problem.” Here we provide a study of this phenomenum. We find these problems are close in structure to problems having a dual that is an integral, dynamic Leontief Substitution System. The duals of integral Leontief Substitution Systems have feasible sets with a least element so they have an integral solution for any objective having non-negative coefficients.
Gary J. Koehler

Chapter 7. Qualitative Reasoning

Theory and Applications
This paper presents a general theory of qualitative reasoning (QR) systems which includes, as special cases, reasoning methods that use representations of qualitative differential equations and qualitative difference equations. Based on set theory, our QR framework describes fundamental concepts such as qualitative models and solutions, and relates them to the quantitative analogues of its underlying quantitative reference system. Our motivation arises from the types of models found in the social sciences. Thus we emphasize the significance of discrete, dynamic models and optimization models in the management and economics fields, both of which have received less attention in current QR research. We discuss in detail rules constraint reasoning, a QR system based on qualitative difference equations. Finally, we extend on theoretical framework to include an approach to qualitative optimization.
Aimo Hinkkanen, Karl R. Lang

Chapter 8. An Architecture for Knowledge Management Featuring Metaknowledge

In our tribute to Andrew B. Whinston, we return to our roots to examine an area that is important today but had not been described in the literature when we wrote our dissertations -- knowledge management. We briefly describe knowledge management, give an architecture for a general knowledge management system, and give examples to illustrate how metaknowledge could assist in a knowledge management system.
Roger Alan Pick, George P. Schell

Modelling in Electronic Business


Chapter 9. Multi Agent Enterprise Modeling

The advent of information technology has made today’s enterprises increasingly distributed. To stay competitive organizations of today have to manage the different components of their technology by integrating and coordinating them into a highly efficient, effective, and responsive system. Rather than dealing with each component individually, it is necessary to have a new paradigm for management of enterprise systems, so that all the components and their operations can be managed in an integrated fashion. The multi-agent framework presented in this paper is such a paradigm for achieving enterprise integration. We specifically emphasize the coordination mechanisms needed for ensuring the orderly operations and concerted decision making among the components - i.e., agents - of an enterprise.
Riyaz Sikora, Michael J. Shaw

Chapter 10. Designing IT-Supported Market Mechanisms for Organizational Coordination

Markets have always taken a prominent place in Professor Andrew Whinston’s research. In his earlier work, for example, he concentrated on finding conditions under which resources can be allocated in a non-convex economy, although economists had raised questions about the applicability of markets in such an economy. In later research, he also applied the market idea to non-conventional application areas. Some of the most influential research is in the area of developing models and methods for real-time problem solving and resource management in computer networks. His most recent research, recognizing the potential opportunities the networked environment provides to companies, has taken the market idea to the internal economy of organizations: how to design IT-supported coordination systems for organizational resource allocation. In this essay, we discuss some issues that differentiate IT-supported internal markets from IT-supported commerce between different companies. We then draw on recent research by Dr. Whinston and his colleagues on market mechanisms to illustrate how such systems might be designed.
Sulin Ba, Jan Stallaert

Chapter 11. Congestion Based Pricing and Management of Distributed Computational Resources

Congestion based usage pricing for management of IT resources has been discussed for several decades. However, a whole array of fundamental issues plagued productive discussions about its feasibility in computing environments. Under Prof. Whinston’s leadership, co-authors of this article have participated in several projects whose primary purpose was to move the discussion of economic modeling beyond normative discussion to real-time computability and implementation. The research has addressed some of the fundamental objections to externality based pricing, i.e., the problem of acquiring customers private information regarding their demand characteristics. The research agenda in the network and computing resources pricing has now moved to management of particular environments -- from corporate networks to distributed database environments. In this article we summarize the key ideas that were generated by the research group at CREC on theory and implementation of congestion based pricing. These include issues ranging from demonstration of computational feasibility of such prices based on transient system information to the issue of incentives of network infrastructure owners in the presence of multiple co-existing pricing paradigms. In addition, we will discuss and present other applications of this work and directions of future research.
Alok Gupta, Boris Jukic, Prabhudev Konana

Chapter 12. Pricing Virtual Private Networks — An Economic, Engineering and Experimental Approach

This chapter presents a network traffic-pricing model for virtual private network (VPN) deployed on packet-switching networks. A transaction-level pricing architecture based on proxy server technology is proposed for the implementation. Analytical expressions of pricing formulas for first-in-first-out and round-robin bandwidth are derived. Both agent-based simulations and the human subject based direct experiment have been conducted using real-time test data. The experimental outcomes strongly support that the pricing mechanism can effectively improve a VPN’s transmission efficiency measured by the service welfare rate.
Zhangxi Lin, Peng Si Ow, Dale O. Stahl

Chapter 13. Knowledge Representation: A Classification with Applications in Telecommunications and the Web

Knowledge representation is often treated as an integral part of artificial intelligence (AI), robotics, machine learning, formal languages and other research areas. However, knowledge representation applications can be found today in different sectors of industry, including e-commerce, manufacturing, and telecommunications. This paper reviews knowledge representation schemes found in the AI literature, and identifies commonalities in perspectives and underlying philosophies of the various representation schemes. A close examination of the different schemes reveals that they can be classified under one or more of the four major knowledge representation philosophies: objects, networks, frames, and logic. Newer knowledge representation applications of these philosophies, specifically XML, UML and ontologies, are discussed and examples of their use in telecommunications and Web applications are given.
Prudence T. Zacarias Kapauan, Eugenia Fernandez

Chapter 14. Quasi-naturally Occurring Experiments With Electronic Markets and Digital Products

Organizational design includes the technology infrastructure, business processes, decision rules, incentive systems and control mechanisms. However, a key question facing managers and researchers alike is whether many of the theories regarding traditional markets, products and services are applicable to digital product businesses as well. Digital products are unique in that they can be instantly delivered to the customer and they also exhibit significant economic, marketing, production and technology related differences from their physical analogs. Thus, what can be a pragmatic yet conceptually sound basis for assessing alternative design of digital product companies? To address these issues, we developed a new approach at the Center for Research in Electronic Commerce at the University of Texas under the guidance of Prof. Andrew Whinston, that we call “quasi-naturally occurring experiments” and make the case that in the absence of well-developed and tested theories in the area of digital products and markets, such experiments will be critical to testing underlying design assumptions and rationale. This chapter presents our experience during two semesters.
Anitesh Barua, Ramnath K. Chellappa

Chapter 15. Finding the Right Products and Devising Marketing Strategies for E-Tailing

The tremendous growth of the Internet has created opportunities for consumers and firms to participate in an online global marketplace. It is conceivable that in the future every person with access to a computer will interact with firms marketing on the Internet. The potential of the Internet as a commercial medium and market has been widely documented in a variety of media. In this research, we focus on the use of the Internet as a virtual storefront where products are offered directly to customers. Our contention is that both product characteristics and consumer purchase behaviors play major roles in the successfulness of its marketing on the Internet. If we can identify the factors that impact the use of on-line marketing approach, we can build a framework to help evaluate the chance for a company to succeed in e-commerce.
Melody Kiang, Robert T. Chi, Kar Yan Tam

Chapter 16. To Surf Or To Ride

An Analysis of Channel Competition Between Electronic and Retail Stores
We study the competition between two shopping channels, i.e. electronic stores and retail stores, to focus on the profitability and expansion strategies of these channels as a function of consumer characteristics and store cost structure. A consumer’s choice of a store is determined by price differences, perceived risk in online buying, network comfort level, and retail discomfort level (logical distance between a consumer and a retail store). Based on Hotelling’s model of spatial competition, we find that the number of retail stores has no effect on the optimal pricing strategies of either the electronic store or the retail store. The result holds even when the retail stores belong to one chain. The optimal prices of the two channels move in the same direction at different rates with changes in the importance of network comfort level.
Beomsoo Kim, Byungtae Lee

Chapter 17. Organizational And Economic Mechanisms For Buyer-Supplier Contracts

In this paper, we present an overview of the nature of contracts in a buyer-supplier business environment, and identify factors that affect the contract relationships. Concepts from transaction cost theory and agency theory as well as the resource-based view are applied to develop an outline for mechanisms that can govern buyer-supplier contracts.
Seung Kyoon Shin, R. Ramesh, H. Raghav Rao

Chapter 18. The Intelligent Internal Accounting Control Model Under E-Business Environment

This paper reviews the history of the development of TICOM (The Internal Control Model), a computer-assisted method for designing and evaluating accounting internal control systems. Early research on TICOM primarily addressed the development of a modeling language and analytical procedures for evaluating the effectiveness of the modeled system of controls. Later research sought to enhance the capabilities of TICOM through knowledge management and natural language processing. This research demonstrated the potential to develop a computer-based tool for internal control evaluation that could support a high-level of interaction with the auditor, improving both the user interface and the reasoning capabilities of TICOM. The latest proposed model, TICOM-V, is based on a logical specification of an auditing domain problem under e-Business environment and utilizes artificial intelligence and logic programming language concepts in computer science. A number of benefits are derived from this interdisciplinary approach: (1) TICOM-V is a more natural representation for the internal accounting control description than previously available under e-Business environment; (2) PROLOG is closer to natural language systems based on a declarative programming language in computer science than the PASCAL language used in the old TICOM; (3) The result improves on the previous TICOM models by providing a more convenient means of delivering the analysis benefits of TICOM, in particular, the contraction algorithm for identifying pre-conditions before a particular process. These factors help produce a system that offers greater auditability and maintainability under e-Business environment than previously possible.
Kyeong Seok Han, James H. Gerlach

Chapter 19. Internet Diffusion In Developing Countries

A Socio-Technical Model
Whinston and Kalakota have proposed a layered architecture for E-commerce, analogous to the 7-layer OSI model. Some of its components are purely technical while others involve social and political elements. It explicitly recognizes that E-commerce is a socio-technical activity and suggests certain building blocks with which to structure the same. In this article we report initial efforts to develop a model, which takes a systems view to analyze how social and technical drivers are likely to interact and drive Internet diffusion in developing countries. These countries, in particular, need to understand the complex mechanics of this diffusion process in order to realize their potential for growth in the new world of E-Commerce based trade and business. The systems dynamics methodology is used to develop the model allowing for simulation of different growth scenarios and policy alternatives.
Amitava Dutta, Rahul Roy

Multidisciplinary Business Modelling Progress


Chapter 20. Advances In Business Problem Solving: Bridging Business And Computing Disciplines

Fifty years have passed since the first business computing system began regular operations in 1951. Today, business computing systems in their may manifestations are important and often essential for the competitiveness or even survival of most organizations. This spectacular leap has been fueled by unrelenting advances in computer and communications technologies. It has been driven by the need to effectively deal with relentless growth in the volumes and complexity of knowledge produced and confronted by organizations in the course of their business activities. It has been guided by the successful bridging of computing and business disciplines in the interest of business problem solving. This chapter examines the exceptional bridging work of a remarkable contributor to the business computing field: Professor Andrew Whinston. It does so by way of a framework for appreciating both the multidisciplinary nature of the field and Andy’s significant global contributions to it. The still unfolding legacy of Andy’s work provides an outstanding role model and inspiration for both seasoned colleagues and beginning students throughout the business computing field.
Clyde W. Holsapple

Chapter 21. The Intellectual Contribution Of Professor Andrew B. Whinston To The Field Of Information Systems In The Past Two Decades

A Citation Analysis
The purpose of this article is to explore professor Andrew B. Whinston’s intellectual contribution to research in information systems in the past two decades. Information Systems is a young and fast growing field. In the past two decades, professor Whinston has pioneered in Decision Support Systems, Electronic Commerce, and many other research areas. We performed a citation analysis to explore the distribution of professor Whinston’s publications and articles that cited them. A total of sixty-eight professor Whinston’s articles and books have been collected in the Science Citation Index and Social Science Citation Index since 1980. The total number of citations is 357, which shows his significant contribution to the growth of this important field.
Hsiangchu Lai, Yen-Ching OuYang, Ting-Pen Liang

Chapter 22. IT Reference Disciplines — Andy Whinston, A Case Study

This work results from the support, collegiality, and synergies so characteristic of the Center for the Study of Unique Non-Convex Technologies, a circa ‘70’s unofficial but very productive K-school (name deleted to protect the innocent) research center. Andy Whinston’s written contributions to this current manuscript are identical to his written contributions to the numerous papers generated at the center. It is important, however, to remember that those of us who can think and conceptualize, do actually think and conceptualize. Those of us who cannot, write.
James R. Marsden, David E. Pingry


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