Title page for ETD etd-12102002-142145

Type of Document

Master's Thesis

Author

Wang, Qiong

Author's Email Address

qiwang1@vt.edu

URN

etd-12102002-142145

Title

Optimal Investment Strategies for Flexible Resources, Considering Pricing and Correlated Demands

Degree

Master of Science

Department

Industrial and Systems Engineering

Advisory Committee

Advisor Name	Title
Bish, Ebru K.	Committee Chair
Huang, Philip Y.	Committee Member
Koelling, Charles Patrick	Committee Member

Keywords

pricing
resource flexibility
stochastic
Resource investment decision under uncertainty

Date of Defense

2002-12-05

Availability

restricted

Abstract

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.
For this purpose, we consider a monopolistic situation and model the demand curve of each demand-class as a downward sloping linear function of its own price.
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 stochastic 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 under uncertainty.

We show that it can be optimal for the firm to invest in the flexible resource when demand patterns are perfectly positively correlated, while it is not always optimal to invest in the flexible resource when demand patterns are perfectly negatively correlated.

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