flexibility and uncertainty the preserving of flexibility when faced with uncertainty is a neglected aspect of behaviour under risk yet it is an important factor in decisions to hold liquid assets or delay irreversible investment this paper formalizes the notion of flexibility in a sequential decision context and relates its value to the amount of information an agent expects to receive a rudimentary money demand model is developed embodying these ideas and the history of flexibility as an economic concept is traced choices are frequently made between alternatives that imply different degrees of future commitment between a short term investment that leaves future options open for example and a long term one that by its very nature forecloses those options the relative attractiveness of the two depends on their probability distributions of payoffs over time a basic consideration in this choice is the recognition that beliefs about the risks governing these payoffs may change current doubts may be partially resolved in the near future this prospect decreases the attractiveness of the longer term commitment in that one is able to respond less fully to new information and even if it does not directly affect the risks associated with shorter term choices enhances their appeal this paper formalizes the above remarks by establishing connections between the following two partial orderings the first is an ordering based on variability of beliefs one set of beliefs is more variable than another if more final risk is resolved at an intermediate stage the more one expects to learn by an intermediate period relative to what one knows today the more variation one is anticipating in beliefs about the final outcome the second is an ordering of current actions or positions based on flexibility one position is more flexible than another if it leaves available a larger set of future positions at any given level of cost these two orderings are incorporated in a simple sequential decision model to suggest the following behavioural principle the more variable are a decision maker s beliefs the more flexible is the position he will choose this principle potentially applies whenever i there will be opportunities to act after further information is received and ii current actions influence either the attractiveness or availability of different future actions

optimal insurance in incomplete markets this paper examines the theory of optimal insurance purchasing in the presence of uninsurable background risk existing theorems concerning the optimal level of insurance and the optimal form of an insurance contract are shown to hold only under restricted market and risk assumptions in particular conditions sufficient for the optimality of full coverage or sufficient for the optimality of deductible policies depend on the correlation between insurable and uninsurable risks these results may provide a partial explanation why existing theory is often contradicted by observable behavior

single period multiproduct inventory models with substitution we study a single period multiproduct inventory problem with substitution and proportional costs and revenues we consider n products and n demand classes with full downward substitution i e excess demand for class i can be satisfied using product j for i j we first discuss a two stage profit maximization formulation for the multiproduct substitution problem we show that a greedy allocation policy is optimal we use this to write the expected profits and its first partials explicitly this in turn enables us to prove additional properties of the profit function and several interesting properties of the optimal solution in a limited computational study using two products we illustrate the benefits of solving for the optimal quantities when substitution is considered at the ordering stage over similar computations without considering substitution while ordering specifically we show that the benefits are higher with high demand variability low substitution cost low profit margins or low price to cost ratio high salvage values and similarity of products in terms of prices and costs

time preference and international lending and borrowing in an overlapping generations model two economies represented by diamond type overlapping generations models and differing only in their pure rates of time preference are joined together capital formation balance of payments behavior and welfare are compared under autarky and openness with a positive natural rate of growth the low time preference country runs a current account surplus in the steady state but not necessarily outside it if preexisting capital is not shiftable between countries integration in the world economy makes the high time preference country worse off in the short run the ranking of stationary utility levels under autarky and openness is ambiguous

dynamic capacity management with substitution we examine a multiperiod capacity allocation model with upgrading there are multiple product types corresponding to multiple classes of demand and the firm purchases capacity of each product before the first period within each period after demand arrives products are allocated to customers customers who arrive to find that their product has been depleted can be upgraded by at most one level we show that the optimal allocation policy is a simple two step algorithm first use any available capacity to satisfy same class demand and then upgrade customers until capacity reaches a protection limit so that in the second step the higher level capacity is rationed we show that these results hold both when all capacity is salvaged at the end of the last demand period as well as when capacity can be replenished in the latter case an order up to policy is optimal for replenishment although finding the optimal protection limits is computationally intensive we describe bounds for the optimal protection limits that take little effort to compute and can be used to effectively solve large problems using these heuristics we examine numerically the relative value of strictly optimal capacity and dynamic rationing the value of perfect demand information and the impact of demand and economic parameters on the value of optimal substitution

investment and capacity choice under uncertain demand this paper extends the real options literature by discussing an investment problem where a firm has to determine optimal investment timing and optimal capacity choice at the same time under conditions of irreversible investment expenditures and uncertainty in future demand after the project is installed with a certain maximum capacity this capacity is fixed as an upper boundary to the output and cannot be adjusted later on it turns out that in the framework of this once and for all decision uncertainty in future demand leads to an increase in optimal installed capacity but on the other hand it causes investment to be delayed to an extent that even small uncertainty makes waiting and accumulation of further information the optimal decision for large ranges of demand limiting the capacity which may be installed weakens this extreme effect of uncertainty

the value of operational flexibility in the presence of input and output price uncertainties with oil refining applications refining is indispensable to almost every natural resource based commodity industry it involves a series of complex processes that transform inputs with a wide range of quality characteristics into refined finished products sold to end markets in this paper we take the perspective of a profit maximizing refiner that considers upgrading its existing simple refinery to include intermediate conversion flexibility i e the capability of converting heavy intermediate components to light ones we present a stylized two stage stochastic programming model of a petroleum refinery to investigate the value drivers of conversion flexibility and the impact of input and output market conditions on its economic potential conversion flexibility adds value to refineries by either transforming a nonprofitable situation into a profitable one referred to as purchase benefit or improving profitability of an already profitable situation referred to as unit revenue benefit in a real data calibrated numerical study w

the transition from payroll to consumption receipts with endogenous human capital abstract the transition from payroll to consumption receipts is simulated in a life cycle growth model featuring adult human capital as in other studies savings are higher under the consumption base however unlike those studies much of the additional savings here take human form human capital production increases for all cohorts in or yet to join the labor market as of the tax change the additional human capital production tends to dampen physical capital accumulation when compared with otherwise identical simulations which hold human capital constant the implications for intergenerational incidence are similar to that found in other examinations of the transition to a consumption base

optimal investment strategies for flexible resources considering pricing and correlated demands we study the optimal resource investment decision faced by a two product price setting firm that operates in a monopolistic setting and employs a postponed pricing scheme the firm has the option to invest in dedicated resources as well as a more expensive flexible resource that can satisfy both products while the resource investment decision is made under demand uncertainty pricing and resource allocation decisions are postponed to the time when demand curves are realized our analysis provides the structure of the firm s optimal resource investment strategy as a function of demand parameters and investment costs and shows that the flexible resource investment decision follows athreshold policy we also show that it can be optimal for the firm to invest in the flexible resource even when demand patterns are perfectly positively correlated the reason for flexible capacity investment in this case is financial rather than risk pooling on the other hand we show that it can be optimal for the firm not to invest in the flexible resource even when demand patterns are perfectly negatively correlated the flexible resource investment decision in this case depends on the profitability of the two products based on our analysis we provide principles on the firm s optimal resource investment decision

resource flexibility with responsive pricing this article studies two types of flexibility used by firms to better respond to uncertain market conditions resource flexibility and responsive pricing we consider a situation in which a single flexible resource can be used to satisfy two distinct demand classes while the resource capacity must be decided based on uncertain demand functions the resource allocation as well as the pricing decision are made based on the realized demand functions we characterize the effects of two key drivers of flexibility demand variability and demand correlation assuming normally distributed demand curve intercepts demand variability creates opportunity costs and with fixed prices decreases the firm s profit we show that with the additional flexibility gained from responsive pricing the firm can maximize the benefits of favorable demand conditions and mitigate the effects of poor demand conditions ultimately profiting from variability positive demand correlation on the other hand remains undesirable under responsive pricing the optimal capacity of the flexible resource is always increasing in both demand variability and demand correlation this contrasts with the scenarios based on fixed prices highlighting the crucial difference that responsive pricing makes in the management of flexible resources we further quantify the value of flexibility for the firm and its customers by considering as a benchmark a firm relying on two dedicated resources the value of flexibility is most significant if the demand levels are highly variable and negatively correlated in such cases the firm benefits from demand variability due to responsive pricing while facing limited demand risk due to resource flexibility finally we endogenize the input price of the flexible resource by considering the pricing decision of the resource supplier

capacity decisions for high tech products with obsolescence abstract modern high tech products experience rapid obsolescence capacity investments must be recouped during the brief product lifecycle during which prices fall continuously we employ a multiplicative demand model that incorporates price declines due to both market heterogeneity and product obsolescence and study a monopolistic firm s capacity decision we investigate profit concavity and characterize the structure of the optimal capacity solution moreover for products with negligible variable costs we identify two distinct strategies for capacity choice demarcated by an obsolescence rate threshold that relates both to market factors and capacity costs finally we empirically test the demand model by analyzing shipping and pricing data from the pc microprocessor market

who benefits from transshipment exogenous vs endogenous wholesale prices this paper studies how transshipments affect manufacturers and retailers considering both exogenous and endogenous wholesale prices for a distribution system where a single manufacturer sells to multiple identical cost retailers we consider both the manufacturer being a price taker and the manufacturer being a price setter in a single period setup under multivariate normal demand distribution in the case of the manufacturer being a price taker we provide several analytical results regarding the effects of key parameters on order quantities and profits in the case of the manufacturer being a price setter we characterize the stackelberg game that arises and provide several insights into how the game dynamics are affected by transshipments specifically we find that risk pooling makes retailers order quantities less sensitive to the wholesale price set by the manufacturer hence in general the manufacturer benefits from retailers transshipments by charging a higher wholesale price while retailers are often worse off the paper captures the effect of demand correlation and the effect of the number of retailers throughout and it illustrates the findings by a numerical example we also provide an interactive web page for numerical experiments

capital mobility in the world economy an alternative test abstract this paper proposes a new measure and test of international capital mobility in order to investigate capital flows we utilize a small open economy version of campbell and mankiw s nber macroeconomic annual 1989 185 216 permanent income model our capital mobility measure focuses on the correlation between the country s consumption and net output instead of the correlation between domestic saving and domestic investment proposed by feldstein and horioka economic journal 90 1980 314 329 the model is estimated for 11 oecd countries the results suggest that the null hypothesis of perfect capital mobility cannot be rejected for more than a half of these countries on the other hand some kind of capital mobility constraints are detected for several countries including the united states and japan

managing flexible capacity in a make to order environment flexible capacity has been shown to be very effective to hedge against forecast errors at the investment stage in a make to order environment this flexibility can also be used to hedge against variability in customer orders in the short term for that purpose production levels must be adjusted each period to match current demands to give priority to the higher margin product or to satisfy the closest customer however this will result in swings in production inducing larger order variability at upstream suppliers and significantly higher component inventory levels at the manufacturer through a stylized two plant two product capacitated manufacturing setting we show that the performance of the system depends heavily on the allocation mechanism used to assign products to the available capacity although managers would be inclined to give priority to higher margin products or to satisfy customers from their closest production site these practices lead to greater swings in production result in higher operational costs and may reduce profits

inventory management under price based and stockout based substitution abstract we examine a stochastic inventory and pricing problem for a firm that sells two vertically differentiated products the demands for the two products are determined by total random market size and the customers net utility from buying the two products which is determined by the products quality attributes the individual quality valuation unknown to the firm and the selling prices in case the preferred product is out of stock customers may be willing to buy a substitute instead if their net utility is non negative therefore we analyze an inventory and pricing model considering price based and stockout based substitution we show that the demand function is not continuous in price by decomposing the profit function into different price regimes we are able to derive closed form expressions for the stockout based substitution rates upward and downward substitution and the optimal inventory levels under exogenous pricing under endogenous pricing we find that the profit function is not necessarily unimodal however we show that a unique solution exists for the integrated price and inventory problem under price based substitution only numerical results reveal that not considering stockout based substitution i leads to lower profit margins for high quality products and ii may cause severe supply demand mismatches throughout the entire assortment finally we show the performance of two approximated pricing policies

a classification of the literature on the planning of substitutable products abstract a company s assortment of products and corresponding inventory levels are constrained by available resources such as production capacity storage space and capital to acquire the inventory thus customers may not always be able to find a most preferred product at the time of purchase this unsatisfied demand is often substituted with an alternative in the extant literature there have been an increasing number of studies that consider product substitution when planning product assortment inventory and capacity in conjunction with pricing in this paper we classify the literature on the planning of substitutable products published in the major om and marketing journals during the past thirty years 1974 2013 and present a comprehensive taxonomy of the literature one criterion is adopted to discuss modeling objectives and three major criteria are provided to define the nature of product substitution including substitution mechanism substitution decision maker and direction of substitutability we also identify research gaps to provide guidance for related research in the future

optimal production pricing and substitution policies in continuous review production inventory systems abstract we consider the optimal production pricing and substitution policies of a continuous review production inventory system with two products a high end product and a low end product each product has its associated customer stream however the demands for the low end product may be satisfied by the high end product we formulate the problem as a markov decision process and characterize the structure of the optimal control policy which specifies when to produce for each product when to use the high end product as a substitute and how to set the optimal prices we show that a base stock production policy is optimal however the optimal base stock level for each product depends on the inventory level of the other product and it features a monotonic property we also demonstrate that the optimal substitution policy is a rationing policy with the rationing level depending on the total inventory amount we find that the optimal prices can be either decreasing or increasing in the inventory levels depending on the forms of demand functions furthermore we utilize numerical experiments to investigate the impact of different system characteristics on the benefits of using substitution and dynamic pricing finally we investigate when the dynamic pricing strategy and the substitution strategy are complements or substitutes

strategic technology choice and capacity investment under demand uncertainty this paper studies the impact of competition on a firm s choice of technology product flexible or product dedicated and capacity investment decisions specifically we model two firms competing with each other in two markets characterized by price dependent and uncertain demand the firms make three decisions in the following sequence choice of technology technology game capacity investment capacity game and production quantities production game the technology and capacity games occur while the demand curve is still uncertain and the production game is postponed until after the demand curve is revealed we develop best response functions for each firm in the technology game and compare how a monopolist and a duopolist respond to a given flexibility premium we show that the firms may respond to competition by adopting a technology which is the same as or different from what the competitor adopts we conclude that contrary to popular belief flexibility is not always the best response to competition flexible and dedicated technologies may coexist in equilibrium we demonstrate that as the difference between the two market sizes increases a duopolist is willing to pay less for flexible technology whereas the decision of a monopolist is not affected further we find that a firm that invests in flexibility benefits from a low correlation between demands for two products but the extent of this benefit differs depending on the competitor s technology choice our results indicate that higher demand substitution may or may not promote the adoption of flexibility under competition whereas it always facilitates the adoption of flexibility without competition finally we show that contrary to intuition as the competitor s cost of capacity increases the premium a flexible firm is willing to pay for flexibility decreases

optimal capacity for substitutable products under operational postponement abstract we consider a monopolist producing two substitutable products with one flexible shared capacity the demand of each product is a linear function of the prices of both products and is subject to an additive shock we study the impact of two key drivers namely the degree of substitution between the products and the level of operational postponement on the optimal capacity and the resulting expected profit we show that the relationship between the optimal capacity and the degree of product substitution is not impacted by the different postponement strategies the firm can utilize or by the different settings forced clearance versus holdback considered in the previous literature on the other hand how capacity is affected by postponement critically depends on how closely substitutable the products are in particular we show that the well known result that operational postponement and capacity are strategic complements in a single product setting van mieghem and dada 1999 no longer holds in our setting because the two substitutable products are now linked through consumer driven substitution which the firm can influence through pricing in particular capacity and operational postponement in the form of quantity postponement can be either strategic substitutes or strategic complements and this depends on both the firm s cost structure and the degree of substitution between the products we also study the impact of forced clearance on the firm s expected profit and find that clearance deteriorates the firm s earnings more when the products it offers are highly differentiated

optimal investment in product flexible manufacturing capacity this paper presents a model and an analysis of the cost flexibility tradeoffs involved in investing in product flexible manufacturing capacity flexible capacity provides a firm with the ability to respond to a wide variety of future demand outcomes but at the expense of the increased cost of acquiring flexible manufacturing capacity as compared with dedicated or nonflexible capacity we formulate the product flexible manufacturing capacity investment decision as a two stage stochastic program in the first stage the firm must make its investment decision in manufacturing capacity before the resolution of uncertainty in product demand in the second stage after demand for products are known the firm implements its production decisions constrained by the first stage investments the main contributions of this paper are threefold first we develop a model of the firm s flexible manufacturing investment decision that conceptually captures some of the key characteristics of this complex decision probl

entry deterrence by timing rather than overinvestment in a strategic real options framework this paper examines a dynamic incumbent entrant framework with stochastic evolution of the inverse demand in which both the optimal timing of the investments and the capacity choices are explicitly considered we find that the incumbent invests earlier than the entrant and that entry deterrence is achieved through timing rather than through overinvestment this is because the incumbent invests earlier and in a smaller amount compared to a scenario without potential entry if on the other hand the size of the investment is exogenously given the investment order changes and the entrant invests before the incumbent does

flexible service capacity optimal investment and the impact of demand correlation we consider a firm that provides multiple services using both specialized and flexible capacity the problem is formulated as a two stage single period stochastic program the firm invests in capacity before the actual demand is known and optimally assigns capacity to customers when demand is realized sample applications include a car rental company s use of mid sized cars to satisfy unexpectedly high demand for compact cars and an airline s use of business class seats to satisfy economy class demand we obtain an analytical solution for a particular case when services may be upgraded by one class the simple form of the solution allows us to compare the optimal capacities explicitly with a solution that does not anticipate flexibility given that demand follows a multivariate normal distribution we analytically characterize the effects of increasing demand correlation on the optimal solution for the case with two customer classes the effects of demand correlation are intuitive increasing correlation induces a shift from flexible to dedicated capacity when there are three or more classes there are also adjustments to the resources not directly affected by the correlation change as correlation rises these changes follow an alternating pattern for example if the optimal capacity of one resource rises then the optimal capacity of the adjacent resource falls these results make precise conjectures based on numerical experiments that have existed in the literature for some time

optimal ordering and pricing strategies in the presence of a b2b spot market abstract in the current paper we examine the effect of a b2b spot market on the strategic behavior and the performance of a reseller who continues to use the traditional channel while participating in a b2b spot market we analyze the case in which a risk neutral reseller faces an additive or multiplicative demand function and identify sufficient conditions under which the optimal order quantity and retail price exist and are unique we then analytically examine the case in which a risk averse reseller participates in a fully liquid spot market we also study numerically how varying liquidity spot price volatility demand variability and correlation coefficient affect a firm s strategies and performance we find that demand variability significantly affects both pricing and ordering strategies whereas the spot price volatility has less influence on pricing decisions our results also show that for a risk averse reseller to charge a lower retail price when the spot market liquidity increases is desirable we further show that a b2b spot market cannot always improve a reseller s utility these findings shed light on how resellers can adjust their procurement and pricing strategies to align with the new business environment created by the emergence of b2b spot markets as well as have obvious implications for the development of a b2b spot market

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

optimal flexibility configurations in newsvendor networks going beyond chaining and pairing we study the classical problem of capacity and flexible technology selection with a newsvendor network model of resource portfolio investment the resources differ by their level of flexibility where level k flexibility refers to the ability to process k different product types we present an exact set theoretic methodology to analyze newsvendor networks with multiple products and parallel resources this simple approach is sufficiently powerful to prove that i flexibility exhibits decreasing returns and ii the optimal portfolio will invest in at most two adjacent levels of flexibility in symmetric systems and to characterize iii the optimal flexibility configuration for asymmetric systems as well the optimal flexibility configuration can serve as a theoretical performance benchmark for other configurations suggested in the literature for example although chaining is not optimal in our setting the gap is small and the inclusion of scale economies quickly favors chaining over pairing we also demonstrate how this methodology can be applied to other settings such as product substitution and queuing systems with parameter uncertainty

multi resource investment strategies operational hedging under demand uncertainty abstract consider a firm that markets multiple products each manufactured using several resources representing various types of capital and labor and a linear production technology the firm faces uncertain product demand and has the option to dynamically readjust its resource investment levels thereby changing the capacities of its linear manufacturing process the cost to adjust a resource level either up or down is assumed to be linear the model developed here explicitly incorporates both capacity investment decisions and production decisions and is general enough to include reversible and irreversible investment the product demand vectors for successive periods are assumed to be independent and identically distributed the optimal investment strategy is determined with a multi dimensional newsvendor model using demand distributions a technology matrix prices product contribution margins and marginal investment costs our analysis highlights an important conceptual distinction between deterministic and stochastic environments the optimal investment strategy in our stochastic model typically involves some degree of capacity imbalance which can never be optimal when demand is known

comparative statics analysis of multiproduct newsvendor networks under responsive pricing we propose a novel analytic approach for the comparative statics analysis of multiproduct multiresource newsvendor networks under responsive pricing our approach involves exploiting the properties of the primal mathematical programming formulation and of the dual variables and linking those properties to the concept of convex orders and to properties of the underlying demand function the use of convex orders allows us to establish our main results without restriction to a specific demand distribution a major strength of our approach is that it is scalable i e it applies to newsvendor networks with any number of nonindependent i e demand or resource sharing products and resources without an exponential increase in effort as problem size increases this is unlike the current approaches commonly used in the operations management literature which typically involve a parametric analysis of the recourse problem followed by the use of jacobians and the implicit function theorem providing a rigorous framework for comparative statics analysis which can be applied to other problems that are not amenable to traditional parametric analysis is our main contribution we demonstrate this approach on the optimal capacity decision problem in multiproduct newsvendor networks under responsive pricing formulated as a two stage stochastic programming problem with recourse the firm determines the resource capacities ex ante in the first stage when demand intercepts are uncertain and makes the pricing and production decisions ex post in the second stage when demand intercepts e g market conditions are fully observed this particular problem and its variants are well studied in the operations management literature a comparative statics analysis is integral to the study of the capacity investment decision as it allows answers to important questions such as the following does the firm acquire more or less of the different resources available as demand uncertainty increases does the firm benefit from an increase in demand uncertainty using our proposed approach we establish comparative statics results on how the newsvendor s expected profit and optimal capacity decision change with demand risk in multiproduct multiresource newsvendor networks we also extend our analysis to the study of demand dependence in two product networks

taxation of asset income in the presence of a world securities market abstract this paper examines a capm model of world security prices in which governments recognize their ability to influence international security prices via their tax treatment of foreign and domestic investors in this model governments have the incentive to set tax rates such that investors tend to specialize in domestic securities and to restrict net capital flows between countries each country does this to increase the utility of domestic residents taking as given the tax policies of other governments but the net outcome is a reduction in world efficiency and likely a reduction in the utility of all investors

strategic facility location capacity acquisition and technology choice decisions under demand uncertainty robust vs non robust optimization approaches abstract this paper presents a robust optimization ro modeling approach to develop insights into strategic capacity planning and resource acquisition decisions including the facility location problem and the technology choice problem the main purpose of the proposed model and numerical experiments is to examine the effects of economies of scale economies of scope and the combined effects of scale and scope under uncertain demand realizations using robust optimization the type of capacities or technology alternatives that a firm can acquire can be classified on two basic dimensions the first dimension relates to the effects of scale via distinction between labor intensive technologies and capital intensive technologies the second dimension relates to the effects of scope via distinction between product dedicated and flexible technologies moreover each product dedicated and flexible technology can have different levels of labor or capital intensity leading to the joint effects of economies of scale and economies of scope extensive computational results document how the optimal technology choice patterns depend on the cost structures and levels of model robustness specified to accommodate uncertain demand realizations the results obtained by the two stage robust optimization approach are compared to the results obtained by a non robust approach

third degree stochastic dominance here f x and g x are less than cumulative probability distributionis where x is a continuous or discrete random variable representing the outcome of a prospect the closed interval a b is the sample space of both prospects the integral shown in rule 2 and those shown throughout the paper are stieltjes integrals recall that the stieltjes integral fb f x dg x exists if one of the functions f and g is continuous and the other has finite variation in a b let d1 d2 and d3 be three sets of utility functions x d1 is the set containing all utility functions with 4 x and 1 x continuous and 41 x 0 for all xe a b d2 is the set with x 1 x 2 x continuous and q j x 0 02 x o for all xc a b d3 is the set with x 1 x 2 x 3 x continuous and 1 x 04 2 x o o for all xc a b here 1 x denotes the ith derivative of x hadar and russell proved that rule 1 is valid for all cd1 and rutle 2 is valid for all ed2 the authors point out that the set of probability distributions that can be ordered by means of second degree stochastic dominance is in general larger than that which can be ordered by means of first degree stochastic dominance note that in rule 2 they assume that x is not only an increasing function of x but also exhibits weak global risk aversion a condition guaranteed by requiring the second derivative of x to be nonpositive in this paper a condition which will be called third degree stochastic dominance is considered it is based on the following assumption about the form of the utility function x from a normative point of view one expects the risk premium associated with an uncertain prospect to become smaller the greater is the individual s wealth the plausibility and implications of this assumption h ave been explored by john pratt as well as others the risk premium of an uncertain prospect is that amount by which the certainty equivalent of the prospect differs from its expected value in mathematical terms given the prospect f x with expected value a the corresponding risk premium t is obtained by solving the following equation rb

coordinating the resource investment decision for a two market price setting firm abstract we study the capacity investment decision of a two product firm that is a price setter for both products the products are of varying complexities such that the resource that can be used to produce the higher level product can also be used to produce the lower level one but not vice versa although the firm needs to make its capacity investment decision under demand uncertainty it can utilize this limited downward resource flexibility in addition to pricing to more effectively match its supply with demand as an example consider a firm that owns a main plant satisfying both end product and intermediate product demand and a subsidiary satisfying the intermediate product demand only we formulate this decision problem as a two stage stochastic programming problem with recourse and analyze the impact of coordinated decision making when the resource flexibility is taken into account in the investment decision and demand correlation on the firm s optimal investment strategy our results offer managerial principles on the firm s optimal resource investment strategy

spillover effects and the terms of trade within a two country model this paper analyzes the long run interdependence of national fiscal policies through changes in the terms of trade and the real rates of interest between two countries the two commodity structure permits the analysis of fiscal interdependence even in the case of no capital mobility and hence more insight into welfare implications of the relationship between the degree of capital mobility and spillover effects will be obtained we shall also investigate welfare implications of import restriction or export promotion policies so as to produce favorable temporal and intertemporal terms of trade effects

a note on probability distributions with increasing generalized failure rates distributions with an increasing generalized failure rate igfr have useful applications in pricing and supply chain contracting problems we provide alternative characterizations of the igfr property that lead to simplify verifying whether the igfr condition holds we also relate the limit of the generalized failure rate and the moments of a distribution

flexible production resources and capacity utilization rates a robust optimization perspective abstract this paper presents a novel application of robust optimization ro in the context of optimal choices of product dedicated and flexible capacities in a spatial setting specifically we examine the impact of acquiring flexible production technologies on a firm s overall capacity utilization rates under demand uncertainty uncorrelated negatively and positively correlated demands are considered we implement an efficient ro algorithm which can solve large samples of robust min max problems in a realistic amount of time this paper examines the impact of three critical factors that lead to different capacity utilization and resource flexibility outcomes the degree of solution robustness selected by the decision maker to accommodate uncertain demand realizations the flexible capacity costs relative to dedicated capacity costs and the level of correlation between product demands one of our results show that according to robust solutions the total capacity may not be fully utilized because of the distinction between largest in unit terms and costliest demand realizations the second result shows that increasing the proportion of flexible capacity can increase capacity utilization however our results report less than full utilization even when using flexible capacity only we show that the optimal amount of flexible capacity and its impact on overall capacity utilization rate substantially depends on demand correlation

joint pricing and inventory control with a markovian demand model abstract we consider the joint pricing and inventory control problem for a single product over a finite horizon and with periodic review the demand distribution in each period is determined by an exogenous markov chain pricing and ordering decisions are made at the beginning of each period and all shortages are backlogged the surplus costs as well as fixed and variable costs are state dependent we show the existence of an optimal s s p type feedback policy for the additive demand model we extend the model to the case of emergency orders we compute the optimal policy for a class of markovian demand and illustrate the benefits of dynamic pricing over fixed pricing through numerical examples the results indicate that it is more beneficial to implement dynamic pricing in a markovian demand environment with a high fixed ordering cost or with high demand variability

incentives and commonality in a decentralized multiproduct assembly system in this paper we explore the impact of decentralized decision making on the behavior of multiproduct assembly systems specifically we consider a system where three components two product specific and one common are used to produce two end products to satisfy stochastic customer demands we study the system under both centralized and decentralized decision making in the decentralized system we prove that for any set of wholesale prices there exists a unique pareto optimal equilibrium in the suppliers capacity game we show that the assembler s optimal wholesale prices lie in one of two regions one leads to capacity imbalance and one does not we use these results to derive insights regarding the inefficiencies that decentralization can cause in such systems in particular several of our findings indicate that outsourcing the management of component supplies may inhibit the use of operational hedging approaches for managing uncertainty

tax reform and external balance abstract this paper examines the effect of a transformation from capital taxation to consumption in an open economy with the residential capital tax rate being endogenous an increase in the domestic consumption tax rate decreases the interest rate increases capital accumulation and increases the domestic country s net foreign asset holdings and trade surplus with the territorial capital tax rate being endogenous an increase in the domestic consumption tax rate may either increase or decrease the domestic country s interest rate net foreign asset holdings and trade surplus depending on the interest elasticity of capital demand

flexible capacity strategy with multiple market periods under demand uncertainty and investment constraint abstract we establish a flexible capacity strategy model with multiple market periods under demand uncertainty and investment constraints in the model a firm makes its capacity decision under a financial budget constraint at the beginning of the planning horizon which embraces n market periods in each market period the firm goes through three decision making stages the safety production stage the additional production stage and the optimal sales stage we formulate the problem and obtain the optimal capacity the optimal safety production the optimal additional production and the optimal sales of each market period under different situations we find that there are two thresholds for the unit capacity cost when the capacity cost is very low the optimal capacity is determined by its financial budget when the capacity cost is very high the firm keeps its optimal capacity at its safety production level and when the cost is in between of the two thresholds the optimal capacity is determined by the capacity cost the number of market periods and the unit cost of additional production further we explore the endogenous safety production level we verify the conditions under which the firm has different optimal safety production levels finally we prove that the firm can benefit from the investment only when the designed planning horizon is longer than a threshold moreover we also derive the formulae for the above three thresholds

capital taxation and accumulation in a life cycle growth model almost all of the serious economic work on savings decisions within the past decade has relied on some variant of the life cycle hypothesis in which savings arise out of individual choices of an optimum lifetime consumption path this paper reexamines the incidence and welfare consequences of capital income taxes within a realistic life cycle model the results suggest that the elimination of capital income taxation would have very substantial economic effects for example a complete shift to consumption taxation might raise steady state output by as much as 18 percent and consumption by 16 percent the long run welfare gain from such a shift would for plausible parameter values exceed 150 billion annually stated somewhat differently shifting to consumption taxation would raise the lifetime utility of the representative consumer by the equivalent of about six years income in the new steady state these estimates dwarf estimates of the static welfare cost of taxation and significantly exceed even extreme previous estimates of the dynamic loss this study departs from earlier analyses of the effects of taxes on capital income in several respects probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving it is shown below that the common two period formulation of saving decisions yields quite misleading results a more realistic model of life cycle savings demonstrates that for a wide variety of plausible parameter values savings are very interest elastic this implies that shifting away from capital income taxation would significantly increase capital formation making possible long run increases in consumption many studies of the welfare effects of capital income taxation have ignored the general equilibrium effects of increased capital formation in an economy with life cycle savings there is no presumption that the undistorted growth path corresponds to any sort of social optimum as peter diamond has shown life cycle savings can lead to a steady state capital intensity either greater or less than the golden rule level more generally it is clear that there is no reason to believe that a life cycle economy will maximize any particular intertemporal social welfare function a fundamental tenet of welfare evaluation is that preexisting distortions must be considered in evaluating the consequences of tax changes the results presented in this paper take explicit account of the nonoptimal character of the no tax steady state this explains in large part why such a sizeable welfare effect of capital taxes is found in an economy far from the golden rule level of capital intensity there are substantial gains in steady state consumption achievable through increased capital formation section i of the paper examines the aggregate savings function in a continuous time life cycle framework the second section clarifies the differences between wage and consumption taxes an aggregate production function is added to complete the model in the third section the effects of changes in capital taxes on both steady state incidence and welfare are considered within a general equilibrium framework the final section of the paper discusses some implications of the results and suggests areas which appear to warrant further study assistant professor of economics massachusetts institute of technology and research analyst national bureau of economic research i am grateful to alan auerbach martin feldstein laurence kotlikoff to the participants in the nber workshop on business taxation and to the harvard public finance seminar for useful discussions james poterba and james buchal performed the numerical calculations

optimal insurance design with random initial wealth abstract an optimal insurance policy is designed when the policyholder faces both insurable and uninsurable risks under a realistic behavioral assumption it may display a disappearing deductible if the uninsurable loss becomes riskier according to any degree of stochastic dominance as the insurable loss increases

the optimal mix of flexible and dedicated manufacturing capacities hedging against demand uncertainty abstract a firm that faces uncertain demands for several product groups needs to decide how much of relatively inexpensive dedicated capacity and how much of more expensive flexible capacity to acquire we model this situation as a two stage decision problem investment and allocation we pay particular attention to the dependence of acquisition policy on existing capacities as most firms facing the problem are not likely to be entirely new we show that if initial capacities are lower than the levels that would be optimal in absence of initial capacities the investment decision is a simple acquire up to optimal levels for each capacity type however if some initial capacity is too high the optimal additions to others depend on its value in a non linear yet intuitive fashion we also pose the issue of choosing the degree of flexibility as the realized product mix will affect the performance of partially flexible machines

allocation of flexible and indivisible resources with decision postponement and demand learning we consider a firm that uses two perishable resources to satisfy two demand types resources are flexible such that each resource can be used to satisfy either demand type resources are also indivisible such that the entire resource must be allocated to the same demand type this type of resource flexibility can be found in different applications such as movie theater complexes cruise lines and airlines in our model customers arrive according to independent poisson processes but the arrival rates are uncertain thus the manager can learn about customer arrival rates from earlier demand figures and potentially increase the sales by postponing the resource allocation decision we consider two settings and derive the optimal resource allocation policy for one setting and develop a heuristic policy for the other our analysis provides managerial insights into the effectiveness of different resource allocation mechanisms for flexible and indivisible resources

international effects of tax reforms in an open economy with international capital flows there is an equivalence relation between income tax consumption tax international borrowing tax and an external interest earning tax this paper analyzes tax reform involving shifts between income and consumption taxes in this setting it is shown that the real effects of such revenue neutral tax reform depend critically on the country s current account position and the nature of the reform in particular whether the world interest rate rises or falls as a consequence of a budget deficit depends on the tax system in force the analysis provides a clear rationale for the international coordination of tax policies copyright 1989 by royal economic society

supply capacity acquisition and allocation with uncertain customer demands we study a class of capacity acquisition and assignment problems with stochastic customer demands often found in operations planning contexts in this setting a supplier utilizes a set of distinct facilities to satisfy the demands of different customers or markets our model simultaneously assigns customers to each facility and determines the best capacity level to operate or install at each facility we propose a branch and price solution approach for this new class of stochastic assignment and capacity planning problems for problem instances in which capacity levels must fall between some pre specified limits we offer a tailored solution approach that reduces solution time by nearly 80 over an alternative approach using a combination of commercial nonlinear optimization solvers we have also developed a heuristic solution approach that consistently provides optimal or near optimal solutions where solutions within 0 01 of optimality are found on average without requiring a nonlinear optimization solver

volume flexibility and capacity investment under demand uncertainty the paper considers optimal capacity investment decisions under uncertainty taking a real options approach concerning the production decision we study a flexible and an inflexible scenario the flexible firm can costlessly adjust production over time with the capacity level as the upper bound while the inflexible firm fixes production at capacity level from the moment of investment onwards we find that the flexible firm invests in higher capacity than the inflexible firm where the capacity difference increases with uncertainty for the flexible firm the initial capacity utilization rate can be quite low especially when investment costs are concave and the economic environment is uncertain as to the timing of the investment there are two contrary effects first the flexible firm has an incentive to invest earlier because flexibility raises the project value second the flexible firm has an incentive to invest later because costs are larger due to the higher capacity level the latter effect dominates in highly uncertain economic environments our model being dynamic enables us to derive the at first sight counterintuitive result that an increase in capacity holding cost raises the capacity level the firm invests in

capacity investment under postponement strategies market competition and demand uncertainty we consider duopoly models where firms make decisions on capacity production and price under demand uncertainty capacity and price decisions are made respectively ex ante and ex post demand realizations the interplay between the timings of demand realization and production decision endows firms with different capabilities flexible firms can postpone production decisions until the actual demand curve is observed but inflexible firms cannot under general demand structures and cost functions we characterize the equilibrium for a symmetric duopoly and establish the strategic equivalence of price and quantity competitions when firms are flexible we investigate the stochastic order properties of capacity and profit and show that they both increase for a flexible firm when the market is more volatile we find that flexibility allows a firm to increase investment in capacity and earn a higher profit while benefiting customers by keeping the price in a narrower range strategic equivalence implies that

fiscal policy in a simple two country dynamic model abstract this paper analyzes the national and international effects of labor and capital income taxes in a two country infinite horizon perfect foresight neoclassical model with endogenous labor supply and capital accumulation two polar regimes of capital income taxation are considered the source based and the residence based the qualitative effects of labor income taxes are shown to be independent of the taxation regime whereas the effects of capital income taxes are not

pricing and the news vendor problem a review with extensions in the newsvendor problem a decision maker facing random demand for a perishable product decides how much of it to stock for a single selling period this simple problem with its intuitively appealing solution is a crucial building block of stochastic inventory theory which comprises a vast literature focusing on operational efficiency typically in this literature market parameters such as demand and selling price are exogenous however incorporating these factors into the mode l can provide an excellent vehicle for examining how operational problems interact with marketing issues to influence decision making at the firm level in this paper we examine an extension of the newsvendor problem in which stocking quantity and selling price are set simultaneously we provide a comprehensive review that synthesizes existing results for the single period problem and develop additional results to enrich the existing knowledge base we also review and develop insight into a dynamic inventory extension of this problem and motivate the applicability of such models

inventory pooling under heavy tailed demand risk pooling has been studied extensively in the operations management literature as the basic driver behind strategies such as transshipment manufacturing flexibility component commonality and drop shipping this paper explores the benefit of risk pooling in the context of inventory management using the canonical model first studied in eppen eppen gd 1979 effects of centralization on expected costs in a multi location newsboy problem management sci 25 5 498 501 specifically we consider a single period multilocation newsvendor model where n different locations face independent and identically distributed demands and linear holding and backorder costs we show that eppen s celebrated result i e that the expected cost savings from centralized inventory management scale with the square root of the number of locations depends critically on the light tailed nature of the demand uncertainty in particular we establish that the benefit from pooling relative to the decentralized case in term

dynamic capacity planning using strategic slack valuation in this paper we analyze a particular aspect of capacity planning that is concerned with the active trading of production facilities for a homogenous product market we provide a theoretical rationale for the valuation and trading of these assets based on a metric of strategic slack we show that trading production assets with non additive portfolio profitability involves complex coordination with multiple equilibria and that these equilibria depend on the foresight in the planning horizon using the concept of strategic slack we have analyzed the dynamics of market structure the impact of asset trading on the level of production of the industry and to derive boundaries on the value of the traded assets moreover through computational learning the formulation is applied to a large oligopolistic electricity market showing that plant trading tends to lead to increased market concentration high prices lower production and a decrease in consumer surplus

inventory centralization games with price dependent demand and quantity discount consider a distribution system consisting of a set of retailers facing a single period price dependent demand of a single product by taking advantage of the risk pooling effect and the quantity volume discount provided by suppliers or third party carriers the retailers may place joint orders and keep inventory at central warehouses before demand realization and allocate inventory among themselves after demand realization to reduce their operating costs under rather general assumptions we prove that there is a stable allocation of profits among the retailers in the sense that the resulting inventory centralization game has a nonempty core we also show how to compute an allocation in the core

an innovative approach for strategic capacity portfolio planning under uncertainties abstract this research studies multi generation capacity portfolio planning problems under various uncertainty factors these uncertainty factors include price uncertainties demand fluctuation and uncertain product life cycle the objective of this research is to develop an efficient algorithm that generates capacity portfolio policies robust to aforementioned uncertainties we model this capacity portfolio planning problem using markov decision processes mdp in this mdp model we consider two generation of manufacturing technology the new generation capacity serves as a flexible resource that can be used to downward fulfill the deficiency of old generation capacity the objective of this mdp model is to maximize the expected profit under uncertainties an efficient algorithm is proposed to solve the problem and provide an optimal capacity expansion policy for both types of capacity moreover we show that the optimal capacity expansion policy can be characterized by a monotone structure we verify our results by detail simulation study

on the benefits of pooling in production inventory systems we study inventory pooling in systems with symmetric costs where supply lead times are endogenously generated by a finite capacity production system we investigate the sensitivity of the cost advantage of inventory pooling to various system parameters including loading service levels demand and production time variability and structure of the production system the analysis reveals differences in how various parameters affect the cost reduction from pooling and suggests that these differences stem from the manner in which the parameters influence the induced correlation between lead time demands of the demand streams we compare these results with those obtained for pure inventory systems where lead times are exogenous we also compare inventory pooling with several forms of capacity pooling

design for postponement a comprehensive characterization of its benefits under unknown demand distributions recent papers have developed analytical models to explain and quantify the benefits of delayed differentiation and quick response programs these models assume that while demands in each period are random they are independent across time and their distribution is perfectly known i e sales forecasts do not need to be updated as time progresses in this paper we characterize these benefits in more general settings where parameters of the demand distributions fail to be known with accuracy or where consecutive demands are correlated here it is necessary to revise estimates of the parameters of the demand distributions on the basis of observed demand data we analyze these systems in a bayesian framework assuming that our initial information about the parameters of the demand distributions is characterized via prior distributions we also characterize the structure of close to optimal ordering rules in these systems for a variety of types of order cost functions

the effect of remanufacturing on procurement decisions for resellers in secondary markets the role of remanufacturing as a competitive tool for firms has been reflected in a number of studies to show that remanufacturing can reduce the unit cost of production by reusing components however the fact that remanufacturing can be used as a strategic tool for serving secondary markets as well has not been acknowledged in the literature in this paper we study the use of remanufacturing as a tool to serve secondary markets specifically we model the case of a reseller who procures used products based on an older generation of technology from an advanced market and then uses one of two options a she can either resell a small fraction of these used products in a developing market where the technology is acceptable or b she can invest in the remanufacturing of these products and then sell them in the developing market at a higher price the main result of the paper is that using remanufacturing to serve secondary markets reduces the number of units procured from the advanced market for the reseller in addition we show based on certain cost structures that the reseller is always better off if she uses remanufacturing to a certain extent

the design of an optimal insurance policy almost every phase of economic behavior is affected by uncertainty the economic system has adapted to uncertainty by developing methods that facilitate the reallocation of risk among individuals and firms the most apparent and familiar form for shifting risks is the ordinary insurance policy previous insurance decision analyses can be divided into those in which the insurance policy was exogenously specified see john gould jan mossin and vernon smith and those in which it was not see karl borch 1960 and kenneth arrow 1971 1973 in this paper the pioneering work of borch and arrow the derivation of the optimal insurance contract form from the model is synthesized and extended

technology selection and capacity investment under uncertainty abstract we analyze the problem of technology selection and capacity investment for electricity generation in a competitive environment under uncertainty adopting a nash cournot competition model we consider the marginal cost as the uncertain parameter although the results can be easily generalized to other sources of uncertainty such as a load curve in the model firms make three different decisions i the portfolio of technologies ii each technology s capacity and iii the technology s production level for every scenario the decisions related to the portfolio and capacity are ex ante and the production level is ex post to the realization of uncertainty we discuss open and closed loop models with the aim to understand the relationship between different technologies cost structures and the portfolio of generation technologies adopted by firms in equilibrium for a competitive setting to the best of our knowledge this paper is the first not only to explicitly discuss the relation between costs and generation portfolio but also to allow firms to choose a portfolio of technologies we show that portfolio diversification arises even with risk neutral firms and technologies with different cost expectations we also investigate conditions on the probability and cost under which different equilibria of the game arise

stable farsighted coalitions in competitive markets in this paper we study dynamic alliance formation among agents in competitive markets we look at n agents selling substitutable products competing in a market in this setting we examine models with deterministic and stochastic demand and we use a two stage approach in stage 1 agents form alliances coalitions and in stage 2 coalitions make decisions price and inventory and compete against one another to analyze the stability of coalition structures in stage 1 we use two notions from cooperative games the largest consistent set lcs and the equilibrium process of coalition formation epcf which allow players to be farsighted thus in forming alliances players consider two key phenomena first players trade off the size of the total profit of the system versus their allocation of this total pie and second they weigh the possibility that an immediate beneficial defection can trigger further counter defections that in the end may prove to be worse than the status quo in particular one such example is that of the grand coalition which we show to be stable in the farsighted sense even though players benefit myopically by defecting from it we also provide conditions under which a situation of a few lone players competing against a large coalition is stable we examine the impact of the size of the market n the degree of competition the effect of cost parameters and the variability of the demand process on the prices inventory levels and structure of the market we discuss the possible strategic implications of our results to firms in a competitive market and for new entrants

dedicated vs product flexible production technology strategic capacity investment choice this paper studies the optimal investment strategies of an incumbent and a potential entrant that can both choose between a product flexible and dedicated technology in a two product market characterized by uncertain demand the product flexible production technology has certain advantages especially when the economic environment is uncertain on the other hand the dedicated production technology allows a firm to commit to production quantities this gives strategic advantages which can outweigh the value of flexibility it turns out that both firms prefer for some scenarios the dedicated production technology however we find that in a game with sequential technology choices both firms investing dedicated will not be an equilibrium especially when the economic environment is more uncertain the incumbent overinvests in product flexible capacity to force the entrant to choose the dedicated technology then the incumbent is the only firm with the product flexible production technology which results in a high payoff

the impact of demand aggregation through delayed component allocation in an assemble to order system we consider an assemble to order system in which multiple products are assembled from a common component and a set of product dedicated components component capacities are chosen prior to a finite horizon selling season and the common component is allocated to the products based on observed demands we propose a collection of allocation mechanisms involving varying degrees of demand aggregation ranging from a scheme under which all demands are observed prior to making the allocation decision to allocations made for each arriving demand in this context we explore the impact of the allocation scheme on sales profits and capacity decisions including the degree of capacity imbalance we find that the benefit from increased demand aggregation is closely linked to the degree of capacity imbalance profit gains from delayed allocation tend to be higher in systems in which the optimal capacity portfolio is highly unbalanced when the allocation decision is made after observing all demands we develop insights into what detailed system parameters lead to the largest gains from demand aggregation and also explore the trade offs associated with the choice of an allocation scheme when customers exhibit impatience if the allocation scheme forces them to wait to be served this paper was accepted by ananth iyer operations and supply chain management

price versus production postponement capacity and competition this article presents a comparative analysis of possible postponement strategies in a two stage decision model where firms make three decisions capacity investment production inventory quantity and price typically investments are made while the demand curve is uncertain the strategies differ in the timing of the operational decisions relative to the realization of uncertainty we show how competition uncertainty and the timing of operational decisions influence the strategic investment decision of the firm and its value in contrast to production postponement price postponement makes the investment and production inventory decisions relatively insensitive to uncertainty this suggests that managers can make optimal capacity decisions by deterministic reasoning if they have some price flexibility under price postponement additional postponement of production has relatively small incremental value therefore it may be worthwhile to consider flexible ex post pricing before production postponement reengineering while more postponement increases firm value it is counterintuitive that this also makes the optimal capacity decision more sensitive to uncertainty we highlight the different impact of more timely information which leads to higher investment and inventories and of reduced demand uncertainty which decreases investment and inventories our analysis suggests appropriateness conditions for simple make to stock and make to order strategies we also present technical sufficiency and uniqueness conditions under price postponement these results extend to oligopolistic and perfect competition for which pure equilibria are derived interestingly the relative value of operational postponement techniques seems to increase as the industry becomes more competitive

capital income taxation in a world economy a territorial system versus a residence system this paper investigates the effects of a tax reform of conversion from capital income to consumption taxes on capital accumulation in a two country model in the territorial system the tax reform will normally lead to a negative comovement between capital accumulation in two countries while in the residence system it will lead to a positive comovement copyright 1991 by royal economic society

technology investment under flexible capacity strategy with demand uncertainty abstract this paper investigates technology investment under flexible capacity strategy with demand uncertainty technology investment enables a firm to reduce its total production cost while flexible capacity strategy aims to reduce a firm s production waste by postponing production until demand is known adopting a general technology investment cost we examine how technology investment cost structure affects a firm s technology investment decisions we derive the conditions under which the firm will benefit from technology investment we show that the firm can increase its expected profit through technology investment only when the unit technology investment cost that varies inversely with the basic technology level is below a threshold however even though the technology investment cost is zero the benefit from the increase in technology level is limited furthermore we analytically determine the optimal technology levels and establish their relationships under different technology investment cost structures our findings will help firms evaluate various technology investment options and choose the most proper one

improving supply chain performance and managing risk under weather related demand uncertainty we consider a manufacturer retailer supply chain for a seasonal product whose demand is weather sensitive the retailer orders from the manufacturer supplier prior to the selling season and then sells to the market we examine how a manufacturer can structure a weather linked rebate to improve his expected profit the proposed class of rebate contracts offers several advantages over many other contract structures including no required verification of leftover inventory and or markdown amounts and no adverse effect on sales effort by the retailer we provide a thorough analysis of the manufacturer s and retailer s decisions in this context we show that the weather linked rebate can take many different forms and this flexibility allows the supplier to design contracts that are pareto improving and or limit his risk in offering the contract and the retailer s risk in accepting it for weather rebates with certain characteristics the manufacturer can fully hedge his risks of offering a weather rebate by paying a risk premium we show how this can be accomplished we also show that the basic structural results extend to settings in which the two parties would like to limit their risk

analytical and managerial implications of integrating product substitutability in the joint pricing and procurement problem abstract this paper studies the analytical and managerial implications of product substitutability on the joint pricing and procurement decisions we consider a single period model with two products an existing product and an improved new product that can substitute the demand for the existing product in case of a shortage demand for each product follows a general distribution with an expected value that is a linear function of the price of the new product while the price of the existing product is determined by the market it is necessary to determine the new product s price and the procurement quantities of both products so as to maximize the profits we analytically show that the expected profit function is unimodal and in the existence of substitution the expected total profit is higher the optimal price and the safety stock of the new product are higher and the optimal safety stock of the existing product is less using these properties an efficient algorithm is developed we also provide a numerical analysis to demonstrate that considering substitution in advance could increase the profitability by 58 and the new product price by 5 while decreasing the total procurement quantity by 15

competition under capacitated dynamic lot sizing with capacity acquisition lot sizing and capacity planning are important supply chain decisions and competition and cooperation affect the performance of these decisions in this paper we look into the dynamic lot sizing and resource competition problem of an industry consisting of multiple firms a capacity competition model combining the complexity of time varying demand with cost functions and economies os scale arising from dynamic lot sizing costs is developed each firm can replenish inventory at the beginning of each period in a finite planning horizon fixed as well as variable production costs incur for each production setup along with inventory carrying costs the individual production lots of each firm are limited by a constant capacity restriction which is purchased up front for the planning horizon the capacity can be purchased from a spot market and the capacity acquisition cost fluctuates with the total capacity demand of all the competing firms we solve the competition model and establish the existence of a capacity equilibrium over the firms and the associated optimal dynamic lot sizing plan for each firm under mild conditions

valuing flexibility as a complex option this paper develops an approach for valuing flexible production systems using contingent claims pricing demand curves for our model s underlying assets output products may be downward sloping in contrast with the standard option pricing assumption also our marginal production exercise costs may be increasing in addition we allow for multiple products and a production capacity constraint these elements of the model result in complex exercise decisions for the contingent claims which comprise the production system s value we illustrate our approach by valuing a flexible system that produces two products which have profit margin functions with stochastic parameters

the impact of budget constraints on flexible vs dedicated technology choice this paper studies the flexible versus dedicated technology choice and capacity investment decisions of a multiproduct firm under demand uncertainty in the presence of budget constraints the firm operates under a capital budget for financing the capacity investment and an operating budget which is uncertain in the capacity investment stage for financing the production we investigate how the tightening of the capital budget and a lower financial flexibility in the production stage the likelihood of having a sufficient operating budget shape the optimal technology choice we find that the dominant regime is one where dedicated technology should be adopted for a larger investment cost range and thus is the best response to the tighter capital budget whereas flexible technology is the best response to lower financial flexibility we identify the key roles that the capacity intensity the ratio of unit capacity cost to total unit capacity and production cost of each technology and the pooling value

capacitated multi item inventory systems with random and seasonally fluctuating demands implications for postponement strategies we address multi item inventory systems with random and seasonally fluctuating and possibly correlated demands the items are produced in two stages each with its own lead time in the first stage a common intermediate product is manufactured the production volumes in the first stage are bounded by given capacity limits we develop an accurate lower bound and close to optimal heuristic strategies of simple structure the gap between them evaluated in an extensive numerical study is on average only 0 45 we use the model to investigate the benefits of various delayed product differentiation postponement strategies as well as other strategic questions including i the benefits of flexible versus dedicated production facilities ii the trade off between capacity and inventory investments and iii the trade off between capacity investments and service levels

tax reform and intergeneration incidence abstract this paper presents a simple analytical framework for understanding intergeneration incidence from tax reform along the transitional growth path of life cycle economies by analyzing the incentive effects of taxes previous studies may give the impression that the impact on intergeneration incidence of converting an income tax to either a consumption or wage tax depends solely on the difference in such incentive effects within the framework of lump sum taxation this paper theoretically investigates under what circumstances the tax postponement effect would be relevant and how the timing of tax payments would affect intergeneration incidence

labor income taxation and human capital accumulation abstract this paper provides alternative analytical results concerning the effect of labor income taxation on human capital accumulation with the tax revenues being consumed by the government and savings being negatively related to the labor tax rate an increase in the labor income tax rate reduces the incentive for human capital accumulation and thus decreases human capital with tax revenues being consumed by government and savings being positively related to the labor tax rate an increase in the tax rate increases the incentive for human capital accumulation and increases human capital with the tax revenues being used to compensate the individuals who pay the taxes an increase in the tax rate has no effect on human capital

inventory decisions for substitutable products with stock dependent demand abstract we study a retailer s inventory policy for two products the products are substitutable and have inventory dependent demand so a higher inventory level of a product increases its sales we model the joint effect of demand stimulation and product substitution on inventory decisions by considering a single period stochastic demand setting we provide the first order optimality conditions for the profit maximizing order quantities and interpret them using marginal analysis we also consider two heuristic solutions that separately account for either demand stimulation or product substitution our numerical analysis reveals that the optimal policy by appropriately using sales information that quantifies substitution and demand stimulation can produce significantly higher profits the profit benefits are lessened under certain circumstances such as when the two products have similar critical fractile values suggesting that in such instances the heuristics may be used effectively

dynamic capacity management with general upgrading this paper studies a capacity management problem with upgrading a firm needs to procure multiple classes of capacities and then allocate the capacities to satisfy multiple classes of customers that arrive over time a general upgrading rule is considered i e unmet demand can be satisfied using multistep upgrade no replenishment is allowed and the firm has to make the allocation decisions without observing future demand we first characterize the structure of the optimal allocation policy which consists of parallel allocation and then sequential rationing specifically the firm first uses capacity to satisfy the same class demand as much as possible then considers possible upgrading decisions in a sequential manner we also propose a heuristic based on certainty equivalence control to solve the problem numerical analysis shows that the heuristic is fast and delivers close to optimal profit for the firm finally we conduct extensive numerical studies to derive insights into the problem it is foun

global facility network design in the presence of competition abstract we study the facility network design problem for a global firm that is a monopolist seller in its domestic market but faces local competition in its foreign market the global firm produces in the face of demand and exchange rate uncertainty but can postpone localization and distribution of the output until after uncertainties are resolved the competitor in the foreign market however enjoys the flexibility of postponing all production activities until after uncertainties are resolved the two firms engage in an ex post cournot competition in the foreign market we consider three potential network configurations for the global firm under a linear demand function we provide the necessary and sufficient condition that one of the three networks is the global firm s optimal choice and explore how the presence of foreign competition affects the sensitivity of the global firm s design to various cost parameters and market uncertainties

information acquisition for capacity planning via pricing and advance selling when to stop and act 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

the value of flexibility in make to order systems the effect of demand correlation we consider a manufacturer of mass customized modular products who orders components under demand uncertainty and sets prices produces to order and trades excess components in a secondary market after this uncertainty is resolved the sequence of events reflects in a parsimonious fashion the considerable reduction in demand uncertainty between the procurement stage and the selling season typical of industries with long supply lead times and short product life cycles we prove that in contrast to conventional wisdom the value of production flexibility and expected profit increase with demand correlation if and only if commonality between the corresponding products does not exceed a threshold we also prove that the value of flexibility and expected profit may each increase or decrease with demand variability depending on demand correlations and component commonalities across the entire product line finally we prove that when demand shocks are independent the optimal product prices are positively correlated if and only if the degree of commonality between the corresponding products exceeds a threshold

capacity optimization under uncertainty the impact of operational time lags time lags in switching operational modes are typical in the manufacturing and power sectors but are not treated in most real options models in this paper we consider a firm that has the opportunity to suspend and to resume production infinitely many times subject to a time lag after each startup decision we contribute to the literature by allowing the firm to determine its level of installed capacity in conjunction with its optimal investment timing we find that an increase in the length of the time lag results in an increase in the optimal capacity level capacity optimization also interacts with the length of the time lag to affect investment timing and the triggers to suspend and resume production thereby weakening the result about hysteresis from a standard real options model under the assumption of a fixed level of capacity a longer lag speeds up the decision to resume operations due to a positive upside to the revenue but delays the suspension of operations by contrast with capacity optimization a longer time lag results in a larger capacity choice which can indirectly delay the investment decision and the timing to resume operations this indirect effect dominates when the level of market uncertainty is low and the time lag is initially small

taxation of investment and savings in a world economy the equilibrium of capital and equilibrium market prices are derived for a world economy with a unified securities market mobile capital no uncertainty and varying tax rates on different sources of income in each country the paper then characterizes optimal tax rates for a small country in this setting focusing on the peculiar incentives created when the before tax rate of return differs among securities due to differences in their typical tax treatment copyright 1986 by american economic association

pricing and operational recourse in coproduction systems coproduction systems in which multiple products are produced simultaneously in a single production run are prevalent in many industries such systems typically produce a random quantity of vertically differentiated products this product hierarchy enables the firm to fill demand for a lower quality product by converting a higher quality product in addition to the challenges presented by random yields and multiple products coproduction systems often serve multiple customer classes that differ in their product valuations furthermore the sizes of these classes are uncertain employing a utility maximizing customer model we investigate the production pricing downconversion and allocation decisions in a two class stochastic demand stochastic yield coproduction system for the single class case we establish that downconversion will not occur if prices are set optimally in contrast we show that downconversion can be optimal in the two class case even if prices are set optimally we consider the benefit of postponing certain operational decisions e g the pricing or allocation rule decisions until after uncertainties are resolved we use the term recourse to denote actions taken after uncertainties have been resolved we find that recourse pricing benefits the firm much more than either downconversion or recourse allocation do implying that recourse demand management is more valuable than recourse supply management special cases of our model include the single class and two class random yield newsvendor models