On the Learning Benefits of Resource Flexibility

72 Pages Posted: 1 Aug 2018 Last revised: 27 Jul 2020

See all articles by Jiri Chod

Jiri Chod

Boston College

Mihalis Markakis

IESE Business School

Nikolaos Trichakis

Massachusetts Institute of Technology (MIT)

Date Written: July 11, 2018

Abstract

Resource flexibility, arguably among the most celebrated operational concepts, is known to provide firms facing demand uncertainty with such benefits as risk pooling, revenue-maximization optionality, and operational hedging. In this article we uncover a heretofore unknown benefit: we establish that resource flexibility facilitates learning the demand, when the latter is censored, which could, in turn, enable firms to make better-informed future operational decisions, thereby increasing profitability. Further, we quantify these learning benefits of flexibility and find them to be of the same order of magnitude as the extensively studied risk pooling benefits of flexibility. This suggests that flexibility’s learning benefits could be a first-order consideration and that extant theories, which view flexibility only as the ability to act ex post, could be underestimating its true value when learning the demand is desirable, for example, when it enables managers to make better ex ante capacity, assortment, or pricing decisions in future periods.

Keywords: Censoring, Flexibility, Inventory, Learning, Risk Pooling

Suggested Citation

Chod, Jiri and Markakis, Mihalis and Trichakis, Nikolaos, On the Learning Benefits of Resource Flexibility (July 11, 2018). Management Science forthcoming, Available at SSRN: https://ssrn.com/abstract=3212177 or http://dx.doi.org/10.2139/ssrn.3212177

Jiri Chod

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Mihalis Markakis

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

HOME PAGE: http://https://www.iese.edu/faculty-research/faculty/mihalis-markakis/

Nikolaos Trichakis (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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