Optimal Investment Strategies for Flexible
Resources, Considering Pricing and Correlated Demands
Ebru K. Bish and Qiong Wang
Grado Department of Industrial and Systems Engineering
Virginia Polytechnic Institute and State University
Blacksburg, VA, 24061-0118
We study the resource
investment decision faced by a firm that offers two demand-classes (i.e.,
products, services), while incorporating the firm's pricing decision into
the investment decision. The firm can invest in dedicated resources, which
can only satisfy a specific demand-class, and/or in a more expensive, flexible
resource, which can satisfy both demand-classes. We consider a two-stage
decision model: In the first stage, the firm determines the dedicated and
flexible resource capacities to invest in under demand uncertainty. In
the second stage, demand curves are realized and the firm optimizes its
revenue through pricing and resource allocation decisions, constrained
by its capacity investment decision in the first stage. Our analysis provides
the structure of the firm's optimal resource investment strategy as a function
of price elasticities and investment costs, and shows how the value of
resource flexibility depends on these parameters and demand correlations.
Based on our analysis, we provide principles on the firm's optimal resource
investment strategy.