Optimal capacity for substitutable products under operational postponement ?
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 firms cost structure and the degree of substitution between the products. We also study the impact of forced clearance on the firms expected profit and find that clearance deteriorates the firms earnings more when the products it offers are highly differentiated.
pricing product substitution capacity planning flexible capacity price/quantity postponement uncertainty