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The Capacity Decision When Product Demand is Uncertain: A Timing Problem Approach

Author

Listed:
  • Jannett Highfill

    (Bradley University)

  • David Quigg

    (Bradley University)

  • Edward Sattler

    (Bradley University)

  • Robert Scott

    (Bradley University)

Abstract

Suppose a firm faces a “timing problem” in its capacity decision: it must acquire capacity, a strict upper bound on production, and set its price before quantity demanded for its product is known. The paper shows that the uncertainty capacity is greater than the certainty capacity when the marginal cost of capacity is low; the reverse holds for high marginal costs. Although there is a systematic relationship between the certainty and uncertainty prices, such differences are small. Therefore, our results suggest that the primary effect of demand uncertainty is on the firm's optimal capacity, rather than on its optimal price.

Suggested Citation

  • Jannett Highfill & David Quigg & Edward Sattler & Robert Scott, 2000. "The Capacity Decision When Product Demand is Uncertain: A Timing Problem Approach," Journal of Economic Insight (formerly the Journal of Economics (MVEA)), Missouri Valley Economic Association, vol. 26(1), pages 71-85.
  • Handle: RePEc:mve:journl:v:26:y:2000:i:1:p:71-85
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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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