Capacity Expansion in the Inverse Newsvendor Environment | Episode No.35

Workshop’s Topic: In the inverse newsvendor problem, a firm adjusts prices to match uncertain demand with a fixed capacity. Within this context, how can we assess the impact of capacity expansion on revenue? ln this paper, we develop a structural approach to address this question. Our method estimates the underlying inverse newsvendor model using historical price and sales data exclusively, and with these estimates, we conduct counterfactual analyses for capacity expansions. Our approach also identifies the firms "information quality", reflecting its ability to gather demand information. We apply our approach to a budget hotel chain. The counterfactual evidence suggests that the effect of capacity expansion on revenue is more pronounced for hotels experiencing greater demand censoring, but this is not necessarily the case for hotels with higher capacity utilization. The expansion of capacity exhibits diminishing marginal returns, while the improvement in information quality demonstrates increasing marginal benefits. Interestingly, we discover that capacity expansion and information quality improvement complement each other when capacity is low but act as substitutes when capacity is high.

Time and Location: 9:30-11:00 AM (GMT+8), Room A523 (School of Management)

Language: Bilingual (Chinese and English)