Price Versus Production Postponement: Capacity and Competition

Management Science INFORMS, Vol. 45, No. 12, December 1999 pp. 1631–1649

19 Pages Posted: 7 Jun 2016

Date Written: December 1999

Abstract

This article presents a comparative analysis of possible postponement strategies in a two-stage decision model where firms make three decisions: capacity investment, production (inventory) quantity, and price. Typically, investments are made while the demand curve is uncertain. The strategies differ in the timing of the operational decisions relative to the realization of uncertainty.

We show how competition, uncertainty, and the timing of operational decisions influence the strategic investment decision of the firm and its value. In contrast to production postponement, price postponement makes the investment and production (inventory) decisions relatively insensitive to uncertainty. This suggests that managers can make optimal capacity decisions by deterministic reasoning if they have some price flexibility. Under price postponement, additional postponement of production has relatively small incremental value. Therefore, it may be worthwhile to consider flexible ex-post pricing before production postponement reengineering. While more postponement increases firm value, it is counterintuitive that this also makes the optimal capacity decision more sensitive to uncertainty. We highlight the different impact of more timely information, which leads to higher investment and inventories, and of reduced demand uncertainty, which decreases investment and inventories. Our analysis suggests appropriateness conditions for simple make-to-stock and make-to-order strategies. We also present technical sufficiency and uniqueness conditions. Under price postponement, these results extend to oligopolistic and perfect competition for which pure equilibria are derived. Interestingly, the relative value of operational postponement techniques seems to increase as the industry becomes more competitive.

Keywords: Capacity; Investment; Pricing; Competition; Production; Inventory; Strategy; Demand Uncertainty

Suggested Citation

Van Mieghem, Jan Albert and Dada, Maqbool, Price Versus Production Postponement: Capacity and Competition (December 1999). Management Science INFORMS, Vol. 45, No. 12, December 1999 pp. 1631–1649. Available at SSRN: https://ssrn.com/abstract=2790932 or http://dx.doi.org/10.2139/ssrn.2790932

Jan Albert Van Mieghem (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Maqbool Dada

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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