Capacity utilization: Theoretical models and empirical tests

Abstract

This paper examines the determinants of industry capacity utilization in 40 chemical product industries over a period of roughly two decades. A series of testable hypotheses are developed based on three operations research models of capacity expansion: the Manne model, the Newsboy model, and the Whitt-Luss model. The hypotheses are tested on the chemical industries sample using multiple regression analysis. The empirical results are consistent with most predictions derived from the Newsboy and Whitt-Luss models, which suggests that firms made expansion decisions in a manner roughly in accordance with these models. Capacity utilization was positively related to capital intensity and the trend rate of demand growth, and was negatively related to demand variability, geographic plant dispersion, and plant ‘lumpiness’. The magnitude of investment scale economies and the extent of multi-plant operation had little effect on capacity utilization.