Information Acquisition for Capacity Planning via Pricing and Advance Selling: When to Stop and Act?
- 1 October 2010
- journal article
- Published by Institute for Operations Research and the Management Sciences (INFORMS) in Operations Research
- Vol. 58 (5), 1328-1349
- https://doi.org/10.1287/opre.1100.0798
Abstract
This paper investigates a capacity planning strategy that collects commitments to purchase before the capacity decision and uses the acquired advance sales information to decide on the capacity. In particular, we study a profit-maximization model in which a manufacturer collects advance sales information periodically prior to the regular sales season for a capacity decision. Customer demand is stochastic and price sensitive. Once the capacity is set, the manufacturer produces and satisfies customer demand (to the extent possible) from the installed capacity during the regular sales period. We study scenarios in which the advance sales and regular sales season prices are set exogenously and optimally. For both scenarios, we establish the optimality of a control band or a threshold policy that determines when to stop acquiring advance sales information and how much capacity to build. We show that advance selling can improve the manufacturer's profit significantly. We generate insights into how operating conditions (such as the capacity building cost) and market characteristics (such as demand variability) affect the value of information acquired through advance selling. From this analysis, we identify the conditions under which advance selling for capacity planning is most valuable. Finally, we study the joint benefits of acquiring information for capacity planning through advance selling and revenue management of installed capacity through dynamic pricing.Keywords
This publication has 43 references indexed in Scilit:
- Dynamic Pricing for Nonperishable Products with Demand LearningOperations Research, 2009
- Inventory Management with Advance Demand Information and Flexible DeliveryManagement Science, 2008
- Structural Properties of Buyback Contracts for Price-Setting NewsvendorsManufacturing & Service Operations Management, 2008
- Selling to the “Newsvendor” with a forecast update: Analysis of a dual purchase contractEuropean Journal of Operational Research, 2007
- Two-Wholesale-Price Contracts: Push, Pull, and Advance-Purchase Discount ContractsManufacturing & Service Operations Management, 2007
- Supply Chain Choice on the InternetManagement Science, 2006
- Pricing and the Newsvendor Problem: A Review with ExtensionsOperations Research, 1999
- Advance‐Purchase Discounts and Price Discrimination in Competitive MarketsJournal of Political Economy, 1998
- Stochastic Inventory Models with Limited Production Capacity and Periodically Varying ParametersProbability in the Engineering and Informational Sciences, 1997
- Some remarks on bayes solutions to the inventory problemNaval Research Logistics Quarterly, 1960