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Capacity decisions for high-tech products with obsolescence

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  • Pangburn, Michael S.
  • Sundaresan, Shankar

Abstract

Modern high-tech products experience rapid obsolescence. Capacity investments must be recouped during the brief product lifecycle, during which prices fall continuously. We employ a multiplicative demand model that incorporates price declines due to both market heterogeneity and product obsolescence, and study a monopolistic firm's capacity decision. We investigate profit concavity, and characterize the structure of the optimal capacity solution. Moreover, for products with negligible variable costs, we identify two distinct strategies for capacity choice demarcated by an obsolescence rate threshold that relates both to market factors and capacity costs. Finally, we empirically test the demand model by analyzing shipping and pricing data from the PC microprocessor market.

Suggested Citation

  • Pangburn, Michael S. & Sundaresan, Shankar, 2009. "Capacity decisions for high-tech products with obsolescence," European Journal of Operational Research, Elsevier, vol. 197(1), pages 102-111, August.
    • Handle: RePEc:eee:ejores:v:197:y:2009:i:1:p:102-111
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    4. Ozer, Muammer, 2011. "Understanding the impacts of product knowledge and product type on the accuracy of intentions-based new product predictions," European Journal of Operational Research, Elsevier, vol. 211(2), pages 359-369, June.

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