Face Of Uncertain Demand Research Articles

Demand uncertainty: Exporting delays and exporting failures

This paper presents a model of trade that explains why firms wait to export and why many exporters fail. Firms face uncertain demands that are only realized after the firm enters the destination. The model retools the timing of the resolution of uncertainty found in models with heterogeneity of firm productivity. This retooling addresses several shortcomings. First, the imperfect correlation of demands reconciles the sales variation observed in and across destinations. Second, since demands for the firm's output are correlated across destinations, a firm can use previously realized demands to forecast unknown demands in untested destinations. The option to forecast demands causes firms to delay exporting in order to gather more information about foreign demand. Third, since uncertainty is resolved after entry, many firms enter a destination and then exit after learning that they cannot profit. This prediction reconciles the high rate of exit seen in the first years of exporting. Finally, when faced with multiple destinations to which they can export, many firms will choose to sequentially export in order to slowly learn more about its chances for success in untested markets.

RESERVE CAPACITY OF PUBLIC AND PRIVATE HOSPITALS IN RESPONSE TO DEMAND UNCERTAINTY

A feature of hospitals is that they face uncertain demand for the services they offer. To cover fluctuations in demand, they need to maintain reserve service capacity in the form of beds, equipment, personnel, etc. to minimize the probability of excess queuing or turning away patients, creating a trade-off between reserve service capacity and economic costs. Using a simple theoretical framework, we show how the reserve capacity established depends on institutional characteristics that can affect the objective of the hospital. In particular, we show that private and public hospitals may provide different levels of reserve capacity. In an empirical application using a panel data set of Spanish hospitals over the period 1996-2006, we model reserve service capacity using a distance frontier approach. Our results show that private hospitals generally react to a lesser extent to demand uncertainty than public hospitals.

Management Insights

Management Insights

Demand Uncertainty: Exporting Delays and Exporting Failures

This paper presents a model of trade that explains why firms wait to export and why many exporters fail. Firms face uncertain demands that are only realized after the firm enters the destination. The model retools the timing of uncertainty resolution found in productivity heterogeneity models. This retooling addresses several shortcomings. First, the imperfect correlation of demands reconciles the sales variation observed in and across destinations. Second, since demands for the firm's output are correlated across destinations, a firm can use previously realized demands to forecast unknown demands in untested destinations. The option to forecast demands causes firms to delay exporting in order to gather more information about foreign demand. Third, since uncertainty is resolved after entry, many firms enter a destination and then exit after learning that they cannot profit. This prediction reconciles the high rate of exit seen in the first years of exporting. Finally, when faced with multiple countries in which to export, some firms will choose to sequentially export in order to slowly learn more about its chances for success in untested markets.

Supply chain coordination under retail competition using stock dependent price-setting newsvendor framework

Short life-cycle products which are characterized by uncertain demand, short selling season and long lead times have been posing many challenges to supply chain members. Demand of these products depends on several factors such as price, quality, service etc. Apart from these, many business practices have revealed that presence of a larger quantity of goods displayed at retail level also attract customers considerably. This paper captures the stock dependency phenomenon and investigates the role of quantity discounts and returns policies in the coordination of a supply chain. Here, the manufacturer in addition to returns policy provides quantity discounts to two competing retailers who face price-sensitive, stock dependent and uncertain demand. Using the newsvendor framework, a combined contract model is developed and sensitivity analysis is performed to analyze the impact of various parameters on supply chain coordination. The result shows that proposed contract mechanism fails to coordinate when the value of price sensitivity factor approaches the value of cross price sensitivity factor. Further, price-sensitivity and cross-price sensitivity have little effect on coordination benefit at lower values of stock dependency whereas there is a significant impact at higher values of stock dependency.

Competition Under Generalized Attraction Models: Applications to Quality Competition Under Yield Uncertainty

We characterize the equilibrium behavior in a broad class of competition models in which the competing firms' market shares are given by an attraction model, and the aggregate sales in the industry depend on the aggregate attraction value according to a general function. Each firm's revenues and costs are proportional with its expected sales volume, with a cost rate that depends on the firm's chosen attraction value according to an arbitrary increasing function. Whereas most existing competition papers with attraction models can be viewed as special cases of this general model, we apply our general results to a new set of quality competition models. Here an industry has N suppliers of a given product, who compete for the business of one or more buyers. Each of the suppliers encounters an uncertain yield factor, with a given general yield distribution. The buyers face uncertain demands over the course of a given sales season. The suppliers compete by selecting key characteristics of their yield distributions, either their means, their standard deviations, or both. These choices have implications for their per-unit cost rates.

Flexibility and adaptability in supply chains: a lesson learnt from a practitioner

Purpose – Facing uncertain demand and supply, customers and suppliers are encouraged to make their supply chain more flexible and adaptive to the environment. The primary objective of this paper is to gain an understanding of the issues surrounding flexibility and adaptability in supply chain management from an industrial practitioner.Design/methodology/approach – A semi‐structured interview and follow up interviews were conducted with a logistics manager of a renowned international company.Findings – The study supports that the aforementioned characteristics, flexibility and adaptability, are useful in practical supply chain applications. Some practical advice is also reported.Originality/value – This paper bridges the gap between academic theoretical studies and the expectations from an industrial practitioner regarding flexibility and adaptability in supply chain management. A similar study could be extended to more industrial practitioners in order to collect more useful opinions from them.

Decision-making and the newsvendor problem: an experimental study

This paper investigates repetitive purchase decisions of perishable items in the face of uncertain demand (the newsvendor problem). The experimental design includes: high, or low profit levels; and uniform, or normal demand distributions. The results show that in all cases both learning and convergence occur and are effected by: (1) the mean demand; (2) the order-size of the maximal expected profit; and (3) the demand level of the immediately preceding round. In all cases of the experimental design, the purchase order converges to a value between the mean demand and the quantity for maximizing the expected profit.

Vertical Control of Price and Inventory

This paper offers a simple approach to the theory of decentralizing inventory and pricing decisions along a supply chain. We consider an upstream manufacturer selling to two outlets, which compete as differentiated duopolists and face uncertain demand. Demand spillovers between the outlets arise in the event of stockouts. The price mechanism, in which each outlet pays a two-part price and chooses price and inventory, virtually never coordinates incentives efficiently. Contracts that can elicit first-best decisions include resale price floors or buy-back policies (retailer-held options to sell inventory back to the manufacturers). (JEL D21, L13, L14, M11)

Information-sharing implications of horizontal mergers

We analyze the effects of uncertainty and private information on horizontal mergers. Firms face uncertain demands or costs and receive private signals. They may decide to merge, sharing their private information. If the uncertainty parameters are independent and the signals are perfect, uncertainty generates an informational advantage to the merging firms, increasing merger incentives and decreasing free-riding effects. From the normative point of view, mergers are socially less harmful than in deterministic markets and may even be welfare enhancing. If the signals are not privately but publicly observed, uncertainty does not necessarily give more incentives to merge, and mergers are not always less socially harmful than in deterministic markets.

Designing the distribution network for an integrated supply chain

We consider an integrated distribution network design problem in which all the retailers face uncertain demand. The risk-pooling benefit is achieved by allowing some of the retailers to operate as distribution centers (DCs) with commitment in service level. The target is to minimize the expected total cost resulted from the DC location, transportation, and inventory. We formulate it as a two-stage nonlinear discrete stochastic optimization problem. The first stage decides which retailers to be selected as DCs and the second stage deals with the costs of DC-retailer assignment, transportation, and inventory. In the literature, the similar models require the demands of all retailers in each scenario to have their variances identically proportional to their means. In this paper, we remove this restriction. We reformulate the problem as a set-covering model and solve it by a column generation approach. With a variable fixing technique, we are able to efficiently solve problems of moderate-size (up to one hundred retailers and nine scenarios).

Demand uncertainty and manufacturer returns policies for style-good retailing competition

This paper investigates the role of the returns policy in the co-ordination of supply chain: A manufacturer provides a return policy for unsold goods to two competing retailers who face uncertain demand. The problem is described with a game theory structure: The manufacturer, as the Stackelberg leader, first commits a returns price to the retailers under a given wholesale price. Upon receiving this information, two competing retailers, as followers, make decisions for their retail price and order size, in which the process of pricing and ordering is played as Nash equilibrium. Anticipated the retailers’ responses, the manufacturer designs his returns policy. Adopting the classic newsboy problem model framework and using numerical study methods, the study finds that the provision of a returns policy is dependent on the market conditions faced by the retailers. The paper also analyses the impact of demand variability on the decisions of optimal retail price and order quantity and profit reallocation between the manufacturer and the retailers. Finally, it investigates how the competing factor influences the decision-making of supply chain members in response to uncertain demand and profit variability.

Theory of the firm facing uncertain demand revisited

Empirical evidence shows that the Principle of Increasing Uncertainty (PIU) introduced by Leland is easily violated. Necessary and sufficient conditions, without relying on the PIU assumption, under which risk-averse monopolistic producers reduce their output levels upon the introduction of the Leland-type demand uncertainty are derived.

Price or quantity setting under uncertain demand and capacity constraints: An examination of the profits

This article considers price formation and quantity setting of a capacity-constrained risk-neutral firm facing uncertain demand. It is shown that the optimal price of a price-setting risk-neutral monopolist decreases with demand uncertainty. With a strictly convex demand function expected profits increase with uncertainty for a quantity-setting monopolist whereas expected profits decrease for a price-setting monopolist. Furthermore, similar results on the effect of uncertainty are derived for a differentiated goods industry.

Modifying the RPI‐X Regulatory System to Include Profit‐sharing

This paper aims to contribute to the economic theory of RPI‐X (price‐cap) regulatory systems which include profit‐sharing between a company and its customers. The particular focus is on whether profit‐sharing can be introduced in an investment‐neutral manner, and on whether there is scope to choose a profit‐sharing system which maximises the expected customer rebate. Using a model of a company choosing optimal capacity in the face of uncertain demand and subject to price‐cap regulation, it is shown that the potential exists for profit‐sharing to be investment‐neutral, and it is suggested that the expected customer rebate is maximised for an investment‐neutral system which is effectively a cap on profits at a specified level.

The Optimum Size of a Producer Service Firm Facing Uncertain Demand

In this paper we present a theory of optimum size and number of clients for a producer service firm performing maintenance and repair services for clients in the manufacturing sector. The theory holds that scale economies vary directly with the level of contact requirements for service delivery. This is illustrated by a model of a monopoly repair specialist in which frequency of breakdown (and therefore client demand for service) is stochastic. Comparative statics are used to draw testable hypotheses from the model which, if extended to a multisite case, may serve as a portion of a general model of producer service location.

Developing optimal pricing and inventory policies for retailers who face uncertain demand

Retailers who sell products such as new fashion items or new toys face considerable uncertainty in demand. Despite this uncertainty, they are required to make two important decisions that depend on the level of demand. First, they need to decide on how the product should be priced over the selling season. Second, they need to determine how much to stock and reorder each period. In this paper, we develop a new model for use by retailers that incorporates the following. First it includes “learning” or updating of demand. Second, it determines the optimal pricing policy. Third, it determines the optimal stocking policy. The new model appears to offer advantages for new items where the selling season is limited and the retailer is quite uncertain about the true demand distribution. Several example problems are solved to illustrate the potential advantages and to indicate the types of questions that can be investigated with the model.

Demand Uncertainty, Forecasting, and Monopolistic Equilibrium

This paper considers the role of forecasting and data-processing in a monopolistic firm facing uncertain demand. The monopoly is considered in a dynamic multiperiod model. Intertemporal links are determined by expenditures on demand analysis in a present period and benefits from this activity (i.e., smaller variance of the prediction error) in future periods. Assuming that the monopoly maximizes its total discounted expected utility from the profit in indefinite time, the outcomes we derive come under the following headings. First, we show that the optimal forecasting strategy is stationary. Second, based on the analysis of the steady state, we find that only monopolies managed by risk-averse individuals are concerned about demand forecasts. Third, we examine the existence and the uniqueness of the optimal demand-forecasting strategy in risk-averse monopolistic firms. Finally, we investigate the welfare effects of demand-forecasting in the risk-averse monopoly. The results indicate that demand-forecasting in a monopolistic firm always increases the expected value of the producer s surplus, but its impact on the expected deadweight loss and the expected consumer surplus cannot be unambiguously determined and depends on the properties of stochastic demand.

Perishable-asset revenue management: Generic and multiple-price yield management with diversion

In any situation of fixed capacity and a perishable service or product, firms want to avoid spoilage of the service or product and receive the most revenue possible in the face of uncertain demand. Stimulation of demand from price-sensitive customers, however, through discount prices to customers that reserve early can help fill capacity. This is attractive if non-price-sensitive customers can be prevented from diverting to the lower rates. This paper provides generic results for deciding how many discount units to sell (the so-called yield-management problem) and extends the generic problem in several ways: (1) to situations with continuous, not discrete resources, (2) to treatment of yield management jointly with overbooking, and (3) to problems with diversion with more than two price classes. Simulation studies using airline data suggest that our decision rules perform better than previous rules now used in practice.

Reliability, risk aversion and the positive theory of public enterprise

This paper extends the theory of reliability by developing it in the context of the positive theory of public enterprise. The public enterprise is assumed to be a size-maximiser and to choose price and capacity in the face of uncertain demand and subject to an expected profit target. It is shown that a risk averse public enterprise will set its levels of price, capacity and reliability either all above or all below those of a risk neutral public enterprise depending on the value of the elasticity of expected sales relative to unity. In addition, it is shown that price changes may be superior to capacity changes as a guide to changes in reliability.