Title page for ETD etd-08032007-211352


Type of Document Dissertation
Author Chen, Weiping
Author's Email Address wpchen@vt.edu
URN etd-08032007-211352
Title Firm's Optimal Resource Portfolio under Consumer Choice, and Supply and Demand Risks
Degree PhD
Department Industrial and Systems Engineering
Advisory Committee
Advisor Name Title
Bish, Ebru K. Committee Chair
Chan, Lap Mui Ann Committee Member
Sarin, Subhash C. Committee Member
Taaffe, Michael R. Committee Member
Keywords
  • Supply and Demand Risk
  • Responsive Pricing
  • Consumer Choice
  • Vertical Differentiation
  • Resource Flexibility
  • Product Differentiation
Date of Defense 2007-07-20
Availability unrestricted
Abstract
We study the optimal resource portfolio for a price-setter firm under a consumer choice model with supply and demand risks. The firm sells two products that are vertically differentiated, and has the option to invest in both dedicated and flexible resources. Our objective is to understand the effectiveness of the two hedging mechanisms, resource flexibility and demand management through production differentiation, under demand and supply risks.

We show that the presence of consumer-driven substitution does not always reduce the need for the firm to offer differentiated products. In particular, when the firm faces demand risk and differential production costs, it might invest in the flexible resource and offer differentiated products for a wider range of parameters. Interestingly, more uncertainty (in the form of additional supply risk) does not always make the firm more eager to adopt a hedging mechanism. This depends on the relationship between resource risks, product attributes, and resource investment costs. On the other hand, when the firm invests in the flexible resource, this never completely replaces the dedicated resources, and always results in a "diverse" resource portfolio. While this happens in the supply risk setting mainly due to resource diversification advantage, it also happens in the demand risk setting due to the vertical differentiation between the products. Finally, in the absence of differential production costs, demand management by itself (without resource flexibility) becomes powerful enough to hedge against the demand risk, but not the supply risk, due to the additional resource diversification benefit of the flexible resource in the latter setting.

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