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Information Acquisition for Capacity Planning via Pricing and Advance Selling: When to Stop and Act?

Author

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  • Tamer Boyacı

    (Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada)

  • Özalp Özer

    (School of Management, The University of Texas at Dallas, Richardson, Texas 75080)

Abstract

This paper investigates a capacity planning strategy that collects commitments to purchase before the capacity decision and uses the acquired advance sales information to decide on the capacity. In particular, we study a profit-maximization model in which a manufacturer collects advance sales information periodically prior to the regular sales season for a capacity decision. Customer demand is stochastic and price sensitive. Once the capacity is set, the manufacturer produces and satisfies customer demand (to the extent possible) from the installed capacity during the regular sales period. We study scenarios in which the advance sales and regular sales season prices are set exogenously and optimally. For both scenarios, we establish the optimality of a control band or a threshold policy that determines when to stop acquiring advance sales information and how much capacity to build. We show that advance selling can improve the manufacturer's profit significantly. We generate insights into how operating conditions (such as the capacity building cost) and market characteristics (such as demand variability) affect the value of information acquired through advance selling. From this analysis, we identify the conditions under which advance selling for capacity planning is most valuable. Finally, we study the joint benefits of acquiring information for capacity planning through advance selling and revenue management of installed capacity through dynamic pricing.

Suggested Citation

  • Tamer Boyacı & Özalp Özer, 2010. "Information Acquisition for Capacity Planning via Pricing and Advance Selling: When to Stop and Act?," Operations Research, INFORMS, vol. 58(5), pages 1328-1349, October.
  • Handle: RePEc:inm:oropre:v:58:y:2010:i:5:p:1328-1349
    DOI: 10.1287/opre.1100.0798
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    3. Ata Allah Taleizadeh & Aria Zaker Safaei & Arijit Bhattacharya & Alireza Amjadian, 2022. "Online peer-to-peer lending platform and supply chain finance decisions and strategies," Annals of Operations Research, Springer, vol. 315(1), pages 397-427, August.
    4. Oksana Loginova & X. Henry Wang & Chenhang Zeng, 2017. "Learning in Advance Selling with Heterogeneous Consumers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 38(6), pages 765-783, September.
    5. Pinçe, Çerağ & Yücesan, Enver & Bhaskara, Prithveesha Govinda, 2021. "Accurate response in agricultural supply chains," Omega, Elsevier, vol. 100(C).
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    7. Guillermo Gallego & Haengju Lee, 2020. "Callable products with dependent demands," Naval Research Logistics (NRL), John Wiley & Sons, vol. 67(3), pages 185-200, April.
    8. Oksana Loginova, 2021. "Advance selling, competition, and brand substitutability," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1765-1781, October.
    9. repec:umc:wpaper:1213 is not listed on IDEAS
    10. Junshan Lin & Chenhang Zeng, 2023. "Pre-order strategies with demand uncertainty and consumer heterogeneity," The Japanese Economic Review, Springer, vol. 74(1), pages 83-115, January.
    11. Nagengast, Arne J. & Bursian, Dirk & Menz, Jan-Oliver, 2021. "Dynamic pricing and exchange rate pass-through: Evidence from transaction-level data," European Economic Review, Elsevier, vol. 133(C).
    12. Retsef Levi & Georgia Perakis & Cong Shi & Wei Sun, 2020. "Strategic Capacity Planning Problems in Revenue‐Sharing Joint Ventures," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 664-687, March.
    13. Yiwei Chen & Vivek F. Farias, 2013. "Simple Policies for Dynamic Pricing with Imperfect Forecasts," Operations Research, INFORMS, vol. 61(3), pages 612-624, June.
    14. Lu, Danning & Wang, Pengyu, 2024. "Dynamic pricing for new experience products in pre-sale mode with social learning," Journal of Retailing and Consumer Services, Elsevier, vol. 76(C).
    15. Huang, Kwei-Long & Kuo, Chia-Wei & Shih, Han-Ju, 2017. "Advance selling with freebies and limited production capacity," Omega, Elsevier, vol. 73(C), pages 18-28.
    16. Yefeng Wang & Li Zhou & Chuanliang Wu, 2023. "Optimal trade-in strategy for advance selling with strategic consumers proportion," PLOS ONE, Public Library of Science, vol. 18(1), pages 1-18, January.

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