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Sequential Solutions to Capacity†Planning and Pricing Decisions

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  • Ramji Balakrishnan
  • K. Sivaramakrishnan

Abstract

Ideally, firms should jointly solve capacity†planning and product†pricing problems. In practice, informational limitations and cognitive bounds may force firms to sequentially solve the two problems. For example, a firm may plan capacity using limited demand information, and update prices subsequently once additional demand information becomes available. In a simple setting, we characterize the economic loss due to such sequential planning. We use simulation experiments to assess the extent of this loss in more complex settings. We find a relatively low loss if the firm plans for capacity using limited demand information and subsequently adjusts product prices to reflect realized market conditions. However, even “reasonable†restrictions on the subsequent price adjustment (e.g., constraining adjusted prices to always exceed full cost) lead to significant economic loss.

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  • Ramji Balakrishnan & K. Sivaramakrishnan, 2001. "Sequential Solutions to Capacity†Planning and Pricing Decisions," Contemporary Accounting Research, John Wiley & Sons, vol. 18(1), pages 1-26, March.
    • Handle: RePEc:wly:coacre:v:18:y:2001:i:1:p:1-26
    DOI: 10.1506/Y6TG-1KQ9-12GV-L5YY
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    Cited by:

    1. Ehsan Ardjmand & Gary R. Weckman & William A. Young & Omid Sanei Bajgiran & Bizhan Aminipour, 2016. "A robust optimisation model for production planning and pricing under demand uncertainty," International Journal of Production Research, Taylor & Francis Journals, vol. 54(13), pages 3885-3905, July.
    2. Eklin, Mark & Arzi, Yohanan & Shtub, Avraham, 2009. "Model for cost estimation in a finite-capacity stochastic environment based on shop floor optimization combined with simulation," European Journal of Operational Research, Elsevier, vol. 194(1), pages 294-306, April.
    3. Eva Labro & Mario Vanhoucke, 2008. "Diversity in Resource Consumption Patterns and Robustness of Costing Systems to Errors," Management Science, INFORMS, vol. 54(10), pages 1715-1730, October.
    4. Natarajan, Ramachandran & Sethuraman, Kannan & Surysekar, Krishnamurthy, 2005. "Reducing incremental costs associated with the delegation of incentive contracting decisions: An analysis of planning and control decisions in a manufacturing setting in the presence of moral hazard," European Journal of Operational Research, Elsevier, vol. 162(3), pages 816-838, May.
    5. Kee, Robert, 2008. "The sufficiency of product and variable costs for production-related decisions when economies of scope are present," International Journal of Production Economics, Elsevier, vol. 114(2), pages 682-696, August.
    6. Stefan Reichelstein & Anna Rohlfing-Bastian, 2014. "Levelized Product Cost: Concept and Decision Relevance," CESifo Working Paper Series 4590, CESifo.
    7. Graziano Coller, 2018. "L?eterno divario tra teoria e prassi del pricing nel Management Accounting," MANAGEMENT CONTROL, FrancoAngeli Editore, vol. 2018(2), pages 11-33.

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