Wednesday March 26, 2014
9:30AM - 10:45AM
Dynamic Production Capacity Management with Price Skimming
We consider a monopolist manufacturer of a durable product who adopts price skimming. The manufacturer has no initial production capacity, and can build and salvage capacity at anytime. The production capacity limits the rate of price skimming, thus endogenizing the product's price trajectory. We show that the manufacturer should never salvage any capacity before exiting the market, and that at anytime, it should build the capacity up to a target level that is independent of the existing capacity. We also show that if the manufacturer only has incomplete information about the market, it would be better o with a slight underestimate of the market potential than an unbiased one.