Optimal Investment Strategies for Flexible Resources, Considering Pricing and Correlated Demands

We study the resource investment decision faced by a firm that offers two demand-classes (i.e., products, services), while incorporating the firm's pricing decision into the investment decision. For this purpose, we consider a monopolistic situation and model the demand curve of each demand-class as a downward sloping linear function of its own price. The firm can invest in dedicated resources, which can only satisfy a specific demand-class, and/or in a more expensive, flexible resource, which can satisfy both demand-classes. We consider a two-stage stochastic decision model: In the first stage, the firm determines the dedicated and flexible resource capacities to invest in under demand uncertainty. In the second stage, demand curves are realized and the firm optimizes its revenue through pricing and resource allocation decisions, constrained by its capacity investment decision in the first stage. Our analysis provides the structure of the firm's optimal resource investment strategy as a function of price elasticities and investment costs, and shows how the value of resource flexibility depends on these parameters and demand correlations. Based on our analysis, we provide principles on the firm's optimal resource investment strategy under uncertainty. We show that it can be optimal for the firm to invest in the flexible resource when demand patterns are perfectly positively correlated, while it is not always optimal to invest in the flexible resource when demand patterns are perfectly negatively correlated.

Name thesis:degree_name

Master of Science

Level thesis:degree_level

masters

Discipline thesis:degree_discipline

Industrial and Systems Engineering

Department dc:contributor.department

Industrial and Systems Engineering

Grantor dc:publisher

Virginia Tech

Year dc:date.issued

2002

Author dc:creator

• Wang, Qiong

Chair dc:contributor.committeechair

• Bish, Ebru K.

Committee members dc:contributor.committeemember

• Koelling, C. Patrick
• Huang, Philip Y.

• pricing
• resource flexibility
• stochastic
• Resource investment decision under uncertainty

Statement dc:rights

• In Copyright

Licence dc:rights.uri

• http://rightsstatements.org/vocab/InC/1.0/

Dc Identifier Other

etd-12102002-142145

OAI identifier oai:identifier

oai:vtechworks.lib.vt.edu:10919/46183