On the Learning Benefits of Resource Flexibility

42 Pages Posted: 1 Aug 2018 Last revised: 2 Oct 2018

See all articles by Jiri Chod

Jiri Chod

Boston College

Mihalis Markakis

Universitat Pompeu Fabra - Department of Economics and Business (DEB); Universitat Pompeu Fabra - Barcelona School of Management

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 show that resource flexibility mitigates censoring of sales data, and thereby facilitates learning the true demand under a variety of practical settings, demand distributions, and model parameters. This suggests that extant models, 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-informed decisions ex ante.

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). MIT Sloan Research Paper No. 5525-18. 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

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

Universitat Pompeu Fabra - Barcelona School of Management ( email )

Barcelona, 08005
Spain

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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