Information Acquisition for Capacity Planning via Pricing and Advance Selling: When to Stop and Act?

Operations Research, 58(5), pp. 1328-1349, 2010

22 Pages Posted: 2 Mar 2009 Last revised: 14 Oct 2017

See all articles by Özalp Özer

Özalp Özer

Jindal School of Management - The University of Texas at Dallas

Tamer Boyaci

ESMT European School of Management and Technology

Date Written: March 1, 2009

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. A numerical study shows 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: Advance selling, capacity, stochastic demand, dynamic pricing, optimal stopping

Suggested Citation

Özer, Özalp and Boyaci, Tamer, Information Acquisition for Capacity Planning via Pricing and Advance Selling: When to Stop and Act? (March 1, 2009). Operations Research, 58(5), pp. 1328-1349, 2010. Available at SSRN: https://ssrn.com/abstract=1351611

Özalp Özer (Contact Author)

Jindal School of Management - The University of Texas at Dallas ( email )

Jindal School of Management
800 W. Campbell Road
Richardson, TX 75080
United States

Tamer Boyaci

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin, 10178
Germany

HOME PAGE: http://https://www.esmt.org/tamer-boyaci

Register to save articles to
your library

Register

Paper statistics

Downloads
248
Abstract Views
1,193
rank
124,300
PlumX Metrics