Short-Run Capacity Planning and Pricing Under Uncertainty
17 Pages Posted: 1 Jul 1997
Date Written: March 1997
Abstract
Banker and Hughes (1994) have demonstrated the economic sufficiency of activity-based unit costs for a firm's pricing and capacity decisions under uncertainty. This paper investigates the performance of the corresponding policy in a setting where the firm can adapt to changing demand conditions by a flexible pricing policy within the commitment horizon for its capacities. The results indicate that a firm may considerably distort its optimal capacity choice when it commits to full cost prices instead. Numerical performance comparisons show that full cost pricing leads to substantial losses even if the capacity choice happens to equal the optimal one.
JEL Classification: D40, D80, L15, M40, M46
Suggested Citation: Suggested Citation