The Capacity Decision When Product Demand is Uncertain: A Timing Problem Approach

Jannett Highfill (), David Quigg, Edward Sattler and Robert Scott
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David Quigg: Bradley University
Edward Sattler: Bradley University
Robert Scott: Bradley University

Journal of Economic Insight, 2000, vol. 26, issue 1, 71-85

Abstract: Suppose a firm faces a “timing problem” in its capacity decision: it must acquire capacity, a strict upper bound on production, and set its price before quantity demanded for its product is known. The paper shows that the uncertainty capacity is greater than the certainty capacity when the marginal cost of capacity is low; the reverse holds for high marginal costs. Although there is a systematic relationship between the certainty and uncertainty prices, such differences are small. Therefore, our results suggest that the primary effect of demand uncertainty is on the firm's optimal capacity, rather than on its optimal price.

JEL-codes: D24 D81 (search for similar items in EconPapers)
Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:mve:journl:v:26:y:2000:i:1:p:71-85

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